Section 2 (20) of Companies Act, 2013 Company means a company incorporated under
this Act or under any previous company law.
The word company has no strictly technical or legal meaning. A body corporate or
corporation includes a company incorporated outside India, but does not include
a co-operative society registered under the law relating to co-operative
societies, and anybody corporate which the Central Government may, by
notification, specify for this purpose. Company is derived from two words:
com-group and companies-bread. Therefore, it means group that eat their bread
The company is given the status of an artificial person. The memorandum and
articles of association, of a company, contemplates the documents, which
sets out the objects and powers of a company. These documents are
accessible to the people either without any costs or on payment of a
nominal amount. Therefore, any person who enters into a contract with the
company is thus presumed to have inspected such documents and thus to be
aware of the powers that are being delegated to the directors.
The memorandum and articles when registered with Registrar of Companies becomes
public document and then they can be inspected by anyone on payment of a
nominal fee. Therefore, any person who contemplates entering into a
contract with the company has the means of ascertaining and is thus
presumed to know the powers of the company and the extent to which they
have been delegated to the directors. In other words, every person dealing with
the company is presumed to have read these documents and understood them
in their true perspective. This is known as doctrine of constructive
The memorandum of association and articles of association are two most important
documents needed for registration and incorporation of a company. The
memorandum of association of a company contains the fundamental conditions
upon which alone the company has been incorporated.
According to Section 2(28) of the Companies Act, 1956 defines the Memorandum
It means the memorandum of association of a company as originally framed or as
altered from time to time in pursuance of any previous company's law or of this
Act. According to Palmer, the memorandum of association is a document of great
importance in relation to the proposed company. It contains the objects
for which the company is formed and therefore identifies the possible
scope of its operation scope of its operation beyond which its action cannot go.
The Articles of association of a company are its bye-laws or rules and
regulations that govern the management of its internal affairs and the
conduct of its business. According to section 2(2) of the Companies Act,
1956 'Articles' means the articles of association of a company as originally
framed or as altered from time to time in pursuance of any previous companies
laws or of the present Act.
Both memorandum of association and the articles of association are public
documents according to section 610 of the Act. These documents become
public documents as soon as they get registered and can be accessible by
any members of the public under the provision of the Act. Therefore,
notice about the contents of memorandum and articles is said to be within the
knowledge of both members and non-members of the company. Such notice is a
deemed notice in case of a members and a constructive notice in case of
The effect of the doctrine of constructive notice is harsh on the outsider who
does business with a company. An outsider who dealt with a company is
deemed to have a constructive notice of the contents of the documents of
the company. An outsider cannot claim relief on the ground that he was
unaware of the powers of the company in case of ultra vires of the company.
The doctrine of constructive notice is more or less an unreal doctrine. It does
not take notice of the realities of business life. People know a company
through its officers and not through its documents.
In the case of Oakbank Oil Co. v. Crum
It has been held that anyone dealing with the Company is presumed not only to
have read the memorandum and Articles, but understood them properly. Thus,
Memorandum and Articles of a company are presumed to be notice to the public.
-Such a notice is called Constructive notice.
Constructive Notice Of Memorandum And Articles Of Association
The memorandum and articles of association of every company are registered with
the Registrar of the Companies. The office of the Registrar is a public office
and consequently the memorandum and articles become public documents.
They are open and accessible to all. It is, therefore, the duty of every person
dealing with the company to inspect its public documents and make sure that his
contract is in conformity with their provisions. But whether a person actually
reads them or not, he is to be in same position as if he had read them. He
will be presumed to know the contents of those documents. This kind of presumed
notice is called constructive notice.
The effect of this rule is that a person dealing with the company is taken not
only to have read those documents but to have understood them according to their
proper meaning. He is presumed to have understood not merely the company's
powers but also those of its officers. Further, there is constructive notice not
merely of the memorandum and articles, but also of all the documents, which are
required by the Act to be registered with the Registrar. According to Palmer,
the principle applies to documents which affect the powers of the company.
One of the suggested approaches is that all documents which are open to public
inspection should be regarded as public documents. This is in keeping with the
disclosure philosophy of company law and things which are required to be
disclosed in a public office, should have public effects and should be usable as
instruments of public accountability. In reference to the document containing particulars
it has been held that it becomes a public document. Persons
dealing with the company would be deemed to have constructive notice as to who
are the directors of the company.
Legal effect: If a person's deals with a company in a manner which is
inconsistent with the provisions contained in MOA and AOA – own risk and
cost and shall have to bear the consequences thereof.
The effect of the doctrine of constructive notice may be summed up as follows:
Ultra Vires Acts According to doctrine of constructive notice, every person dealing
with the company is presumed to have the knowledge of the contents of the
memorandum and therefore if an act is ultra vires the company, he
cannot claim relief on the ground that he was unaware of the fact that
the act is beyond the memorandum (i.e., ultra vires the company). In
India, the outsider dealing with the company is presumed to have the
knowledge of the contents of the memorandum and therefore if an act is found
to be ultra vires, he cannot claim relief on the ground that he had no
knowledge that the act was beyond memorandum, and therefore, ultra
Acts Beyond The Authority Of Directors If there is lack of authority of the directors or other agents of the
company, it is evident from the public documents like articles and
other regulations, the person dealing with the company will be presumed to
have the notice of the lack of authority and therefore he cannot hold
company bound by the act of the directors or other agents. For
example, if the articles require a bill to be signed by two directors,
a person dealing with the company is under the duty to see that it has been
signed by the two directors; otherwise he cannot enforce the bill
against the company. But if the lack of authority of the directors or
agents is not evident from the public documents, he cannot be presumed
to have the notice of the lack of the authority and therefore he can held
company bound by the act of the directors or other agents if he
honestly thinks that the director or the agent with who he is
negotiating is authorized to act on the behalf of the company. For
example, where the articles require the directors to take the consent of the
shareholders by ordinary resolution for exercising thereof the
borrowing powers but they borrow money without taking such consent,
the borrowing will be binding on the company if the creditor has no
notice of the fact that the directors negotiating with him have not taken
Inconsistent Agreements Person dealing with the company is presumed to have the notice of the
contents of the articles and consequently he cannot make a contract with the
company which purports to override any rights created by the articles. The
doctrine of constructive notice protects the company but not the outsider
dealing with the company. Sometimes the doctrine creates much hardship
for the outsiders. They are presumed to have the knowledge of the public
documents like the memorandum of the company but in practice it is
very difficult and time taking to have the complete knowledge of them before
making any contract with the company. Thus, the doctrine is inconvenient and
unreal. It has failed to take the realities of business life. On
account of its evil the doctrine has not been taken seriously both in
India and UK. In England, the doctrine has been abrogated by the Europeans
Communities Act, 1997.
Doctrine Of Indoor Management Indoor Management restricts the operation of constructive notice to the
public documents of the company. The role of the doctrine of indoor
management is opposed to that of the rule of constructive notice.
Accordingly, a person dealing with the company is bound to read only the
public documents. If his contract is consistent with them, the company is
bound. He will not be affected by any irregularity in the internal
management of the company.
According to this doctrine, persons dealing with the company need not
inquire whether internal proceedings relating to the contract are
followed correctly, once they are satisfied that the transaction is in
accordance with the memorandum and articles of association. Shareholders,
for example, need not enquire whether the necessary meeting was convened and
held properly or whether necessary resolution was passed properly. They are
entitled to take it for granted that the company had gone through all
these proceedings in a regular manner. The doctrine helps protect external
members from the company and states that the people are entitled to
presume that internal proceedings are as per documents submitted with the
Registrar of Companies.
The foundation of the rule was laid down in the case of Royal British Bank
v. Turquand2 Turquand, a company, had a clause in its constitution that
allowed the company to borrow money once it had been approved and
passed by resolution (decision) of the shareholders at a general meeting.
Turquand entered into a loan with the Royal British Bank and two of the co-
directors signed and attached the company seal to the loan agreement. Loan
had not been approved by the shareholders. Company defaulted on their
payments and the bank sought restitution. Company refused to repay
claiming that the directors had no right to enter into such an
arrangement. It was held that – the Turquand was entitled to assume that the
resolution was passed. The Company was therefore bound by the rule.
Doctrine is also popularly known as the Turquand rule'.
The doctrine of indoor management is based on the policy of public
convenience and justice. The reason as to why such doctrine is needed
is that the internal procedure, which happens within the company, is
not a matter of public knowledge. Therefore, though any outsider is presumed
to be aware of the documents which are publically accessible, but not
of the internal proceedings of which he cannot be reasonably aware of
because those are not accessible to the public.
The rule is based upon obvious reasons of convenience in business relations.
The memorandum and articles of association are public documents. But
the details of internal procedure are not thus open to public
inspection. Hence, an outsider is presumed to know the constitution of a
company; but not what may or may not have taken place within the doors that
are closed to him. Thus, the doctrine of constructive notice and
indoor management go hand in hand. On one hand, the doctrine of
constructive notice protects the company from the outsiders; on the other
hand, the principal of indoor management offers protection to the
outsiders while dealing with the affairs of the company. The doctrine
of constructive notice comes into picture when an outsider fails to
inquire about the company. However, the doctrine of indoor management can be
invoked by any outsider dealing with the company and cannot be invoked
by the company.
Exceptions To The Rule
The doctrine of indoor management has been used for almost a century now. Since
in the modern world, the companies extended their roles to various social
and political spheres, therefore the scope of this doctrine was widened.
Since the scope was widened, the chances of its misuse also increased, so
the courts came up with following exceptions to this rule:
Knowledge Of Irregularity: In case this 'outsider' has actual knowledge of irregularity within
the company, the benefit under the rule of indoor management would no
longer be available. In fact, he/she may well be considered part of the
irregularity. This exception covers situations where the person dealing with
a company is aware of the irregularities which are present in internal
Such knowledge can be either by actual or constructive notice, and the
person thus cannot claim the benefit under the rule of indoor
management. This exemption can be better understood, by considering the case
T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd
wherein one company lent some money to another company on a mortgage of its
assets. However, the procedure which was necessary to comply before such
transaction, was not complied with.
The directors of the two companies were the same. The court thus held
that since the lender had notice of the irregularity, the doctrine
could not be invoked and hence the mortgage was not binding. The transfer
was approved by two directors, and the transferor was aware of the
fact that one of the directors was not validly appointed, and the
other was disqualified being the transferee himself. Hence, the court
held that the transfer was ineffective.
Negligence: If, with a minimum of effort, the irregularities within a company could be
discovered, the benefit of the rule of indoor management would not apply.
The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite
inquiry, and the outsider dealing with the company does not make proper
The person cannot invoke this doctrine if the person, who is entering
into a contract with the company, has not enquired prudently and has
not made proper inquiries, because of which he is not aware of the
irregularity. If he would have conducted proper inquiries, then would have
known that irregularity exists, and hence it is because of his own fault
that he is unaware of the irregularity.
This exception also covers the situation where the situations surrounding
the contract were so suspicious that a prudent person would have made
an inquiry, but the concerned person has not done so and hence is not
entitled to claim the benefit of the doctrine.
This exception could be better understood while referring to the case of
Lal v. Dinshaw & Co
In this case, the plaintiff accepted a transfer of a company's property
from its accountant. The court held that the transaction entered by the
accountant was clearly beyond the scope of his authority, and hence the
transfer was void. The plaintiff was reasonably expected to see the
power of attorney executed in favour of the accountant before accepting
such transfer by the accountant on behalf of the company.
Forgery: If, with a minimum of effort, the irregularities within a company could be
discovered, the benefit of the rule of indoor management would not apply.
The protection of the rule is also not available where the
circumstances surrounding the contract are so suspicious as to invite
inquiry, and the outsider dealing with the company does not make
proper inquiry. The doctrine of internal management cannot be used to
validate transactions in which the person relies on a document which
has been forged. The leading case on this point is of Shri Kishan
Rathi v. Mondal Brothers and Co. (P.) Ltd.
In this case, the plaintiff was the transferee of a share certificate issued
under the seal of the defendant company. The certificate which was
issued contained the seal of the company and forged signatures of two
directors, and such forgery was done by the company's secretary.
It was being argued by the plaintiff that the matter regarding the
genuineness of the signature is a part of internal management, and
thus, such forgery of the signature cannot be contended by the
company. But the court held that the doctrine of indoor management cannot be
extended to validate and cover forgery cases. The court also said that
this doctrine applies to irregularities which might affect a genuine
transaction and not to forgery.
Representation Through Articles: This exception deals with the most controversial and highly confusing
aspect of the doctrine of indoor management. Articles of association
generally contains what is called the power of delegation. The case
in which the meaning and effect of a delegation clause has been
explained is the case of
Lakshmi Ratan Cotton Mills v. J.K. Jute Mills was a director of a
company. The company had managing agents of which also G was a director.
The article of association, empowered the directors to borrow money and to
further delegate this power to any of them. G borrowed a sum of money from
the plaintiffs. The company argued that since there was no resolution of the
board delegating the power to borrow to G, he was not authorized to borrow
money and hence refused to be bound by the loan. But the court held that the
company is bound to repay the loan.
The rule of constructive liability is an unrealistic doctrine. It expects each
and every outsider not only to know the documents of the company but also
presumes to understand the exact nature of documents, which is practically
not possible, and thus, in my opinion, is a little unfavorable to the
outsiders dealing with the company. However, in reality, the company is not
known by the documents but by the people who represent it and deal with an
outsider. Those who enter into contracts with the company usually do so,
on the basis of goodwill and reputation of the persons representing the
company rather than the documents of the company.
Hence, the courts have evolved the doctrine of indoor management as an opposite
to the doctrine of constructive notice in order to protect the interests
of the outsiders. In my opinion, the doctrine of indoor management is
absolutely necessary for protecting the outsiders and forcing the company
to fulfill their part of obligation in genuine transactions. This also needs to
be implemented subject to certain exceptions and the same have been
evolved by the courts. This is the reason why the British Courts and Indian
Courts have shifted its approach in dealing with the cases relating to the
outsider of the company.
The Indian Courts have not given much importance to this doctrine. The
European Communities Act has also abrogated the concept of constructive
notice by bringing Section 9 of the Act which recognizes the concept of good
faith in business transaction. This provision is in the tune of the
reality of the business transaction, where the outsiders of the company
enter into the various contracts not on the basis of the documents of the
company but on the good faith of the company.
This is the reason why the courts have evolved the doctrine of indoor management
as an opposite to the doctrine of constructive notice in order to protect
the interests of the outsiders. The researcher on the basis of the various
commentaries on the subject and the cases decided by the British Courts and
Indian Courts is of view that merely registration of a company should not
constitute the notice of the documents submitted to the registrar. Also, an
outsider should always have the freedom to make some assumption which a
reasonable person may infer into the particular circumstances.