A PROJECT SYNOPSIS ON:

DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT

Submitted to

NISHIKANT BIBHU
(ASST. PROFESSOR OF LAW)

Submitted By:

PRAGATI DEWANGAN

ID-MU12BALLB10

B.A.LL.B(Law)

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SUBJECT COMPANY LAW

TITLE DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT

STATEMENT OF PURPOSE

In my experience as a law student of B.A.LL.B at MATS Law School , specially as a student

of Law I found this paper as the most technical and the less researched area particularly
when we talk about Corporate Law. Under the Corporate Law we have different sectors
prescribed in which I have opted for Doctrine of Constructive notice and Indoor Management
to work on as this sector is not prone to the frequent research and comments. The topic
Doctrine of Constructive Notice and Indoor Management. My purpose to opt this research
title is to make it more clear and lucid to the common man by explaining the Doctrine and use
and applicability of the same.

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RESEARCH OBJECTIVES & QUESTIONS

TO ASSESS THE MEANING AND CONCEPT OF DOCTRINE

What is the CONCEPT of the Doctrine of Constructive Notice and Indoor

Management?

What is the use of this doctrines in Commerical Areas ?

ORIGIN AND BACKGROUND OF THE DOCTRINES

What is the origin and background of the doctrines?

TO FIND OUT THE PROBLEM WITH THE DOCTRINES

What are the problem and issue with the doctrines?

CURRENT POSITION OF THE DOCTRINE IN INDIA.

What is the current legal position of the doctrine in India?

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ACKNOWLEDGEMENT

For nearly involved in this synopsis, over the one month spent researching and writing this
synopsis has been helpful. Many have been extraordinarily generous with time, information
and counsel. With pleasure, I could dedicate a paragraph to them. But I shall hope that each
of the individuals and institutions named will appreciate the extent and warmth of our
gratitude to them.

Institutions

The library staff of MATS law School who helped us during the entire period, with e-articles
and other materials for the accomplishment of this project work.

Individuals

These are divided into several groups, beginning with those friends, colleagues, and mentors
who supported me all through the work. In no particular order, they are: our honourable
faculty, Nishikant Bibhu Sir and my friends.

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RESEARCH METHODOLOGY

.Scope and Limitations:

The researcher has used the doctrinal method and has relied on the secondary sources for the
content of the research paper.

Owing to the large number of topics that could be included in the project, the scope of this
research paper is exceedingly vast. However in the interest of brevity, this paper has been
limited to the topics which deal with the Doctrine of Constructive Notice and Indoor
Management.

Sources of Data:

I have relied on the following secondary sources of data:

Articles
websites

Method of Writing

The method of writing followed in this project is both analytical and descriptive.

Mode of Citation

The MATS LAW SCHOOL mode of citation has been followed in this project.

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Introduction

This Project is an analysis of the Doctrines of Constructive Notice and Indoor Notification.
The Researchers have taken a straight forwards approach. This research paper delves into the
nature of the Doctrine of Constructive notice to understand its implications on the
commercial world. Doctrine of Constructive Notice was introduced in the earliest days of the
modern companies law. At that time, the concept of limited liability was not yet born and the
insecurity posed by this doctrine to the creditor, was balanced by the risk of the shareholders
in incurring unlimited liability. However, with the arrival of Limited liability, the judiciary
constantly has tried to bypass or do way with this doctrine completely. With the advent of the
Companies Act of 1985 and subsequently, the act of 2006, this doctrine is all but eradicated
from the English corporate law. Thus, all discussions on this topic in this research paper
except for the parts that deal with the current legal position are all for mere academic
discussion. However, in India the rule was never too strictly applied but continues to persist
and the Indian jurisprudence, for this reason has been discussed separately in this paper. This
research paper also analyses the doctrine of indoor management that is often called an
exception to the ruel of constructive notice but the researchers have critically evaluated the
true nature of this doctrine and its expansive ambit. The researcher has then gone ahead with
connecting this doctrine with the general principles of agency in order to restrict its ambit,
lest it become a monster like its parent, the doctrine of Constructive Notice. Here, the
researchers have started with a detailed analysis of the law of agency as applicable to the
Company law. At the same time, the researchers have taken care to maintain a coherent flow
of arguments: the doctrine of constrctive notice is restricted by the doctrine of indoor
management which, in turn, is restricted by the application of the rule of Ostensible authority.
However, this research paper has also restricted its own scope by not accounting for the
liability of the agent in cases of fraud or misrepresentation of self-authority. It also steers
itself clear of the doctrine of Ultra Vires, making only necessary and incidental references to
it for the purposes of clarifying the nature of the Doctrines of Constructive Notice and Indoor
Management.

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Chapter 1: Doctrine of Constructive Notice and Background

Chapter 1.1: Background to the Doctrine of Constructive Notice

The Doctrine of Constructive Notice to be studied in depth requires a preliminary study of

various doctrines that have together blended in to create the situation that in turn led to the
inception of the Doctrine of Constructive notice. These doctrines are The doctrine of
Apparent authority of an agent on one hand and the doctrine of Ultra vires on the other. This
area of company law represents its blend with the law of agency. The company, as is clear to
us, only acts through its agents. Hence, the law of agency is applicable to the acts of the
companys agents who enter into contractual relationships on behalf of the company. An
agent may possess two kinds of authorities, actual or apparent. While actual authority
indicates factual conferment of authority on an individual, apparent authority should first be
taken to mean that there is no real authority but a kind of presumed authority due to
suggestive circumstances. This principle was suitably defined in Freeman and Lockyers
case, but it is still often confused with implied authority. But it must be remembered that
apparent authority is nothing but the impression in the mind of the third party. The crucial
distinction between the two lies in the fact whether there exists a relationship between the
principal or the agent. The Doctrine of Apparent authority was also elaborated in Lockyer and
Freemans Case by Diplock L.J. The requirements that he puts forth for the existence of
actual authority clearly highlight that the basis of such an authority is not the existence of any
such authority but a representation by the principle. This kind of authority is treated distinct
from the person and depends on the representation made by the principal to the world at
large. This representation maybe through expression or direct implication of the principals
conduct, or through the principles general treatment of the agent, say by giving him a
particular position, the outcome of which would ordinarily include bestowal of such authority
on the agent. Such emphasis on representation then brings apparent authority to be further
grounded in the rule against estoppel. The former conduct of the principal is more easily
linked to the rule of estoppel but the latter, general, conduct of the principal is a link made
more artificially. Often the two categories overlap as every representation, as a matter of
practice has some elements of both generality and specificity. However, it must be kept in
mind that the representation should have credibility to be reliable. Thus, for this purpose, the
principle, who makes the representation should have actual authority to do that act, otherwise,
it may not be tenable to assume that one may create a chain of agents and sub-agents with no
actual authority at the root of such ostensible authority. This rule was applied to company law

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as well in Hely-Hutchinson case wherein it was held that de facto discharge of duties of a
position result in ostensible authority. Now we must look at the issue of the agent exceeding
his/her authority. The agent of a company may exceed his/her authority in two ways. Firstly,
the act of the agent may be ratifiable by the Company and secondly, the act may be outside
the legal capacity of the company to ratify. We shall deal with the latter case first while we
elucidate the doctrine of Ultra vires vis--vis the authority of an agent. Now turning to
company law, this general rule of agency has to be more specifically applied. The authority of
an agent here, actual or apparent ,are both hit by the Doctrine of Ultra vires. Here, the
company is not bound by a contract or any other act of its agent, in the exercise of his/her
agency, that the company, by virtue of its Articles or the memorandum, had no legal capacity
to enter. Such an act may not be binding on the company whether the authority of the agent is
actual or apparent.

Chapter 1.2: The Doctrine of Constructive Notice

However, sometimes while the act may not be ultra vires the companys legal authority, it
may still not be in the agents power to perform that act in the course of his/her agency. In
case he he/she still goes ahead to perform that act, the question of authority of an agent
becomes applicable in the company law. The negative application of the wider Doctrine of
Apparent Authority came to be known as the Doctrine of Constructive notice. Simply put,
the Doctrine of Constructive Notice was first envisaged as early as 1857 with respect of Deed
of Settlement companies where it was held that a person dealing with a company should be
deemed to have notice of that companys registered constitutional documents. By, extension,
it also came to be held that such person should also have understood the provisions of these
documents.These Documents may not only include the articles and the memorandum of
association, but also special resolutions and particulars of charges which are required to be
filed with the registrar. However, the ambit of constructive notice does not seem to have
covered the matters filed by a company to disclose the financial information and other
information, in order to assist the shareholder to make an informed judgment. However, the
scope remained uncertain and now is only a matter of academic interest in common law, due
to Companies Act 1989.This doctrine, by itself, seeks to nullify the assumption of ostensible
authority of the agent as it places a burden on the third party contractor to make additional
inquiries into the registered documents of the company and infer the extent of the agents

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authority on that basis as well, in order to protect the company from outsiders. Thus, the rule
may not apply to favour the third party, but only against it.

Chapter 1.3 : Problems with the Doctrine of Constructive Notice

There has been considerable judicial debate in cases, where the company itself has made
representations of apparent authority or the belief of the third party in the authority of the
agent stems from some other source than a reading of the Articles of the company, can the
third party allege that upon reading the articles of association of the company, such authority
of the agent would have been apparent and thus the third party must be assumed to have
constructive notice of the articles? The judicial opinion on the question is largely divided as
to whether the doctrine may operate for the third party. But this question will be analysed by
the researchers in detail in the next chapter where principals of agency are applied to the
doctrine of indoor management. This is to mean that the third party may not be allowed to use
this rule to claim constructive knowledge of the articles of the company to infer the authority
of the agent to enter into a contract, when they do not have actual knowledge of the articles.
The last proposition is itself, highly problematic, but the doctrine itself also creates an
unfavorable climate for business as it creates a disproportionate burden on part of the third
party, which was, in turn, impeding smooth trading. This perception of the doctrine is
strongly criticized, unanimously by the jurists as well as writers. It is not at all a logical chain
of reason that, because the law gave everyone the opportunity to find out about a companys
registered documents, there was a corresponding duty on part of the third party to peruse
through these documents. One justification of having this rule in place was that limited
liability companies did not exist at that point of time and the risk was always on the unwitting
shareholder. Thus, the effort of the third party was counterbalanced by the risk on part of the
shareholder. However, once limited liability became the general norm in company law, the
real risk shifted from the shareholder to the creditor and the rule ceased have such a
justification. Moreover, in the modern times, the business decisions must be made promptly
and the registered documents may only be obtained from the registrars office at great
expense of time and effort. Even before the Limited Liability company was born, the
Doctrine of Constructive notice had the potential of creating an unnecessary risk in the minds
of the Third party. Hence, as early as 1856, legal measures were taken to mitigate the worst of
the implications of the constructive notice rule.

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Chapter 2:

Doctrine of Indoor Management: The Turquand Rule

Chapter 2.1: Inception of the Doctrine

In the famous case of Royal British Bank v. Turquand, the court set forth a proposition of
law that later came to be called the Doctrine of Indoor Management. The doctrine states that
if a person in good faith deals with the board of directors or any other representative body of
a company which is in fact exercising the power of management and direction of its business
and affairs, that person is not affected by defects of procedure within the company or by its
failure to fulfill conditions which are required by the companies memorandum or articles to
be fulfilled before the act or transaction in question is affected. While many authors have
argued that the rule is an exception to the rule of Constructive notice, some also feel that the
doctrine serves a much wider role at a greater level. If we look at the two doctrines with
respect to the point of time when the doctrine of indoor management comes into operation,
we will notice that this doctrine does not really act so much as an exception to the rule of
constructive notice but as a limiting factor to its ambit. Essentially, under the doctrine of
constructive notice, while the third person was bound to take notice of the provisions of a
companys Memorandum and Articles, and thus identify any restrictions in the same, he/she
is not bound to inquire any further. He could take it for granted that the agent has been duly
appointed. This rule has been in place for two reasons. Firstly, to limit the burden of inquiry
placed on the shoulders of the third party entering into a transaction with the company and,
secondly, the third party may not have the means to ascertain whether the inner formalities of
the company are carried out properly or not. Thus, the application of the Turquand rule, or the
doctrine of indoor management, is restricted to people unaware of any irregularity in the
authority of the agent with whom they are contracting. If the circumstances so suggest, the
rule would also protect any member or directors of the company due to their ignorance with
regards to that particular transaction that they seek to enforce. Conversely, any outsider who
has true knowledge of the affairs of the company or is put on inquiry would not be protected
by this rule.Some questions that arise in relation to the Doctrine of Indoor Management are
mostly with respect to its ambit as we shall notice in the next sub-chapter.

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Chapter 2.2: Indoor management and the Laws of Agency:

What should apply? Firstly, it must be made clear that the doctrine of indoor management
doesnt apply to forged documents as has been made clear in the Ruben case wherein it was
clearly held that a forged document is a pure nullity. However, given the wide ambit of such a
ban, there are exceptions to it, such as when an agent of the company, with actual or
ostensible authority, represents the document to be genuine. Even in cases where the agent
may represent his own authority to be genuine, such forgeries will not amount to nullity as
such but general principles of company law would apply. Even in the Kreditbank case forged
documents were held to be null and void. Now looking at the rule of indoor management at a
wider angle, one would see it as a protection for the third party against improper appointment
and thus defective authority of the agent but it would still assume that there has to be at least
an ostensible authority with the agent for the doctrine to apply.3031 However, there might be
cases when the agents authority itself is question, that is to say that it is alleged there is no
authority at all but a sweeping application of the Turquand rule would bind the company to
any transaction entered into by any of its agentswho could have been empowered by the
company to do so and thus create an unnecessary risk for the company. Such was indeed the
case in the early years of its inception as the indoor management rule was applied liberally
and it was held that if there is de facto exercise of power by a person then he may be thought
to be represented as occupying a position that would allow such exercise of power. It would
benefit now to retrospectively analyze the application of indoor management rule with
respect to the principles of agency In Biggerstaffs case the director in question discharged
the functions of the managing director and the articles provided for the appointment of a
managing director but there was a lack of evidence as to whether the director in question was
appointed to the position. The court, referring to Lindley held that so long as there was a
power to appoint and the third party has no notice of any irregularity in the appointment, the
company is bound by the acts of the agent within the usual course of his authority. Thus, in
such cases it is not enough for the court to rely on the rule of indoor management only. In
fact, in the Kreditbank case the English court finally restricted the ambit of indoor
management by stating that not just anyone who could have been delegated the authority to
enter into a transaction on behalf of the company may be allowed to do so. This judgment by
questioning the principal of agency in the doctrine of indoor management seems to usher in
the general principals of agency into company law. Thus, we come to a second kind of
situation where the agent exceeds his/her authority. Unlike indoor management rule, there is

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no defective bestowal of authority, but a lack of authority altogether. Since, now the question
was whether the agent who purports to bind the company with his deeds has the authority to
do so or not, questions of actual and ostensible authority came into the purview of this
research paper. The court also increasingly came to rely on the holding out principal, where
the principal makes a representation of the agent having the requisite authority, which was
already discussed in the preceding chapters under the doctrine of apparent authority. As
already discussed, the principal may make a representation giving authority to the Third Party
in two ways: firstly, by making an express or implied representation to the third party of
granting an authority to the agent to act in a particular transaction and, secondly, by giving
the agent a position with which certain powers are usually associated. The usual authority that
follows the position of the contracting agent is an important factor and was used to bind the
company in the First Energy Case in conjunction with a representation by the agent himself
to that effect. In cases where it is alleged that there is no authority with the agent, the
company may be estopped from denying authority to its agent if it has resorted to any of the
two alternatives but the rule has been applied strictly to determine as to when a person can
rely on the ostensible authority of the agent of a company. In the case of Rama Corporation.,
there was some clarity given to the plethora of seemingly conflicting decisions on the exact
limitation on the indoor notification rule. The court crystallized the principal to mean that the
exact ingredients to construe apparent or ostensible authority of the agent by the third party
should be De facto exercise of power and a representation of actual authority though such
representation may be express or implied. Also, this principle reconciles with the Turquand
rule favorably as the question that the rule essentially deals with is that of De Jure execise of
power. The Doctrine of Indoor Notification was also further limited in Houghton and Co.case
through the judgment of Bankes L.J., who held that the unusual nature of the transaction
should put the third party on inquiry about the real authority of the transacting party an thus
render the rule inapplicable in this sense. However, the Final clarification was offered only in
the Freeman and Lockyer case wherein it was held that in British Thomson Houston Co.
case42 as well as the Mahony case, where the third partys claim was allowed, the contract
was actually hit by the provisions of the Articles and the Memorandum of association of the
companies, but, more importantly, the persons making the claim of authority were people
who, in the ordinary circumstances, would seem to be possessed of such authority by an
outsider who is not familiar with the articles of the company. However, if the persons were
not so, then the contractor [third party] would not be able to claim that they relied on the
representation made unless they were proved to be familiar with the articles of the company,

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in keeping with the rule of law set by Bankes L.J. in Houghton & Co. case. This point is
further elaborated in the next sub-chapter. Moving on to cases where the claim of the third
party failed, the court held that these were cases where the transactions were of an unusual
nature and the assumption of authority by an outsider will not be easy to make. In none of the
case could the contractors have claimed that the agent was acting in the course of the usual
authority that a person in his/her position is expected to possess. Thus, the contractor could
not have relied on the usual authority argument to allege representation by the company.
He/she would have to rely on the relevant provisions of the articles of association, if any. It is
in this respect that the next sub-chapter becomes relevant.

Chapter 2.3: Doctrine of Constructive Notice: Positive construction vis--vis the

Doctrine of Constructive Notice?

We have already studied that where there is a power to delegate functions to an officer of the
company and such an officer purports to bind the company to a transaction, whether or not
such delegation has taken place, the courts have held that a representation of the agents
authority by the principal is necessary for the transaction to be valid. However, in chapter 1.3,
we also discussed the issue of whether or not a party, which has not relied on the articles or
the memorandum of the principal company before transaction, can later enforce the notion of
ostensible authority by claiming a constructive reading of the articles. In cases where there
are such provisions for delegation in the articles and the third party did not have any notice of
such provisions before entering into the contract, the judiciary has been inclined both ways as
we saw in Biggerstaff casewhere the prior knowledge of the articles was not considered to be
necessary so long as there existed a power to delegate. The first case, where this issue seems
to have been that of Underwood v. Bank of Liverpool where the court held that constructive
notice doctrine may only act as a negative doctrine against the third party and not in its
favour. However, in the subsequent case of Houghton and Co. v. Northard Lowe and Wills
ltd. the court overturned the decision of Wright J., who had followed the Biggerstaff ratio and
held that so long as their was a provision for delegation of powers, there need not be
knowledge of such a provision on part of the outsider. The Court of appeal held that the
acting on a mistaken assumption of delegation of power is still to some extent tenable in
court. On the other hand, not knowing that such delegational power even exists and still
relying on it and even exercise of such power by the company when in fact there was no such

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exercise, defeats all tenets of logic. The same logic was subsequently followed in Rama
Corporation case but a conclusive clarification was once again offered in Freeman and
Lockyers judgment wherein it was held that in cases where the transaction is not to be
ordinarily within the power of the agent so purporting, the contractor must rely on the articles
of association to prove that a representation was made and relied upon. However, if the
representation was not known to the third party vide the reading of the articles, then it defeats
all logic for them to contest a reliance on the same. Thus, it was also finally held that the
Doctrine of Constructive Notice is a purely negative one and may only be used against the
third party and not to benefit it.

Chapter 3:

Abolition of the Doctrine Constructive Notice Chapter 3.1: Treaty of Rome and
Subsequent Abolition in Common Law In UK, the Jenkins Committee first made the
argument for reform and abolition of the Doctrine of Constructive notice in 1962 as corollary
to the necessary abolition of the doctrine of Ultra vires. It sought to replace the doctrine with
an elaborate set of rules but it is noteworthy that Commmonwealth countries were coming up
with ways to abolish the doctrine of Ultra vires altogether. Even though the doctrine was
restricted to questions of capacity of a company, the obvious relation between the Doctrine of
Ultra Vires and the Doctrine of Constructive Notice made the doctrine a latent threat in the
mind of the third party. Once the United Kingdom became a part of the Treaty of Rome and
joined the European Community, it had to make certain modifications to its domestic laws in
accordance with the EC First Directive on Company Law. Section 9(1) of the European
Communities Act, 1972 provided protection to the third party dealing in good faith when the
companys capacity was the issue.This section was later re-enacted as Section 35 of the
English Companies Act, 1985. However, it was only in the case of TCB Ltd. v. Gray57 that
the doctrine of Constructive Notice met with its Demise. Sir Nicholas brown-Wilkinson V.C.
held that EC Directive and Section 9(1) of the European Communities Act were aimed at
providing protection to a third party dealing in good faith with a company from unnecessary
harm from the doctrines of ultra vires and constructive notice.However, Section 35 in the
1985 act inadequate to abolish the doctrine completely due to flawed drafting. It only applied
to transactions decided on by directors, and it only applied to the third party but offered no

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counter protection to the company. Hence, Professor prentice while addressing these issues
also recommended the abolition of the Doctrine of constructive notice as well. These
recommendations found placein the 1989 act that recasted Section 35 and Sections 35A but
what the researchers here are concerned with is the addition of Sections 35B61 and 711A62.
Section 35B has no qualifiers and strikes at the doctrine of constructive notice by claiming
that there is no duty to notice on part of the third party as to whether the company has the
legal capacity to enter into that particular transaction or whether the directors posses the
authority to do so. This section effectively spells death for the doctrine of constructive notice
but section 711A while further solidifying this idea, also has the potential to unravel the entire
reformatory approach. Through interpretation, Subsection (2) of 711A might be restricted to
only apply to cases of blatant disregard where any ordinary person might be roused to
inquiry63 However, Section 711A was never brought into force, presumably for the same
reason

Chapter 3.2: Current Legal Position on the Doctrine of Constructive Notice

The current act in Operation in England is the Companies Act, 2006. The provisions of all
these previous acts have been recast into Section 40 of this act. This section deals with the
issue of ultra vires and constructive notice in detail. One of the most important qualifiers for
the application of this article is Good Faith. Unless the third party enters into a contractwith
good faith, this section would not apply. The determination of good faith or lack thereof can
be determined with the aid of Sub-section (2) of Section 40 wherein the entire doctrine of
constructive notice is demolished. At the same time it provides for a presumption of good
faith on part of the third party. The threshold for determining mala fide is pushed even higher
when the section provides that even actual knowledge of incapacity of the company to enter
into that contract, may not mean mala fide on part of the third party. However, a constructive
reading of the section with section 41 makes it clear that Section 41 of the act, that excludes
corporate insiders from the protection granted to third parties as the company reserves to
declare such a transaction voidable so long as it involves one of the directors of the company,
its holding company or someone related to the director of the company.65 Also, one more
exception exist on principle basis to Section 40: Charitable companies

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Chapter 3.3:

Limitations of Section 40 and Turquand Rule Section 40 seems to ignore that the board does
not deal with the third parties except in ashes where either the company is small or the
transaction is too large. In practice the third party generally deals with the executives of the
company or a lower level employee who might not even have a direct connection with the
directors. Now, there might be a case where the constitution ofthe company might not allow
authorization of the officer to enter into contracts when such authority in usual circumstances
is attached to the position. But since there is no auhorisation by the board here, a narrow
construction of Section 40 might exclude the third party from the protection of Section 40. In
such cases, Section 40 protection is supplemented by the Turquand Rule wherein the third
party is accorded protection so long as the conditions for the application of the Doctrine of
Indoor Management are applicable. Finally, it has been held that the authority of the agent
under Section 40 may be established through establishment of ostensible authority. This is so
because the Turquand rule only operates if there is lack of power to delegate and thus lack of
authorization from the board. This construction ensures that the interests of the third party are
balanced against the interests of the agent.

Chapter 4:

Indian Position on the Doctrines of Constructive Notice and Indoor Management

Chapter 4.1: Adoption and Treatment of the Doctrines of Constructive Notice and Indoor
Management in India The Indian courts have since the early times shown a certain degree of
caution and reluctance in applying this doctrine to the detriment of the third party. The first
application of the doctrine of constructive notice, the the researcher could find, seems to be in
the Charnock Collieries case in 1912. However, the mode application is typically the position
before the Kreditbank and the Houghton cases in the common law. The judge in this case
simply holds that the stranger has an obligation to read the articles of the company, but
nothing beyond. Since the articles of the company give the borrowing power to managing
agents along with providing a security on the company, the judge holds that the company is
bound by the agents acts. As early as 1924, the court in Mufassil Bank case, held that so long
as the power of delegation exists in the articles and the act of the agent is not hit by doctrine

16
of ultra vires, the company is estopped from denying its obligations under the contract in
question. The same was continued in the Pratt case. In Dehradun Mussourie Electric
Tramway Co. case70 the issue was that the managing agents had taken an overdraft without
the approval of the board, despite the articles prohibiting the directors from delegating the
power to borrow. The court did not apply the doctrine and held that temporary loans need to
be taken for day to day working of the business. This was in application of the rules of
agency under the Indian Contract Act. Sections 188 and 189 of the act that extensively
empower the agent to take all necessary action to prevent losses to the principal company.
However, one point that is queer in this judgment is the issue of fact as to whether a properly
convened meeting took place to authorize the overdraft. The court takes into account that the
resolution signed was bogus as the evidence suggests that the required meeting never took
place and also that the third party might not have had notice of the same due to the false
representations made by the agent(the false minute-books stated that a meeting did take
place), Chapter 4: Indian Position on the Doctrines of Constructive Notice and Indoor
Management Chapter 4.1: Adoption and Treatment of the Doctrines of Constructive Notice
and Indoor Management in India The Indian courts have since the early times shown a certain
degree of caution and reluctance in applying this doctrine to the detriment of the third party.
The first application of the doctrine of constructive notice, the the researcher could find,
seems to be in the Charnock Collieries case in 1912. However, the mode application is
typically the position before the Kreditbank and the Houghton cases in the common law. The
judge in this case simply holds that the stranger has an obligation to read the articles of the
company, but nothing beyond. Since the articles of the company give the borrowing power to
managing agents along with providing a security on the company, the judge holds that the
company is bound by the agents acts. As early as 1924, the court in Mufassil Bank case, held
that so long as the power of delegation exists in the articles and the act of the agent is not hit
by doctrine of ultra vires, the company is estopped from denying its obligations under the
contract in question. The same was continued in the Pratt case. In Dehradun Mussourie
Electric Tramway Co. case the issue was that the managing agents had taken an overdraft
without the approval of the board, despite the articles prohibiting the directors from
delegating the power to borrow. The court did not apply the doctrine and held that temporary
loans need to be taken for day to day working of the business. This was in application of the
rules of agency under the Indian Contract Act. Sections 188 and 189 of the act that
extensively empower the agent to take all necessary action to prevent losses to the principal
company. However, one point that is queer in this judgment is the issue of fact as to whether a

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properly convened meeting took place to authorize the overdraft. The court takes into account
that the resolution signed was bogus as the evidence suggests that the required meeting never
took place and also that the third party might not have had notice of the same due to the false
representations made by the agent(the false minute-books stated that a meeting did take
place), the court still does not apply the Ruben rule71 to declare the document invalid.
However, it does apply the Turquand rule and binds the company to the transaction. The first
negative application of the Doctrine of Constructive Notice is found in the case of Kotla
Venkataswamy v. Rammurthy, where the doctrine was applied in its usual sense and the third
party mortgagee was denied relief on account of the transaction being irregular in nature.73
In Lakshmi Ratan Cotton Mills case the court once again accorded protection to the third
party by applying the Turquand Rule.

Chapter 4.2: Current Position Of Law in the Matter The recent legal position has not
changed and the courts continue to apply the ratio of Deharadun Mussourie Tramways Case
as recently as 2002 in the Kirlampudi Sugar Mills case wherein the court again held that so
long as the transaction benefits the company, the company is bound by the acts of the agent
and also that the indoor management rule would be applicable. In fact, indoor management
rule has been expressly applied as recently as 2010, wherein, it was used to attribute liability
to the company in question and also, the court established that a director of a company acts in
a fiduciary role.

Chapter 4.3: Indian Position on the Doctrines: Analysis Indian law on agency and
contracts has evolved differently from the Common law. One of the most important reasons
as to why the doctrines of Constructive notice and indoor management do not gain a
substantial foothold in the Indian Jurisprudence can be attributed to the Indian Contract Act,
1872, that also deals with the law of agency in India. Section 188 of the act defines the extent
of the authority of an agent. The section incorporates the usual authority rule in it and thus, it
is easier for the Indian judiciary to take the Freeman and Lockyer approach as discussed in
Chapter 2.3. Furthermore, it has been held that this section should be interpreted to mean that
where the terms of agency are ambiguous and the agent has acted in good faith as per one
construction of his authority, his acts would be binding on the principal. This same rationale
seems to have been applied in the Mussourie Tramways case wherein the agent was held to

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be working for the benefit of the company. Section 189 also is applicable in cases of agency
with respect to a company wherein the agent is granted the authority to do all such acts in
emergency situations as would be necessary for protecting the principal from loss. These two
sections cause a paradigm shift while evaluating the authority of an agent in the Indian law.
The burden upon the agent is not longer to prove that he/she had the authority to perform a
certain act but to prove either that their acts are for the benefit of the company or that their
acts were necessary to protect the company from loss. If that fact is proved, the agents acts
are binding, whether or not the articles of the company confer such authority upon him as
necessary for those acts. When the question of constructive notice has not arisen, the question
of application of the indoor management rule also does not arise. Simple application of the
principles of agency seems to be adequate for the purposes of this article. Finally, the
Doctrine of Indoor Notification also loses importance in light Section 86 of the Companies
act, 1913, that expressly endorses this rule. Thus, the Indian judiciary was never really
dealing with this issue on the same footing as the English judiciary. Our laws already favour
the third partys rights in a transaction by bringing down the burden of proof on the third
party to apply the conditions necessary to apply the indoor management rule. Ideally, the
judges should have resorted to this rule in Lakshmi Ratan Lal Cotton mills case but this
section was enforced in the Albert Judan Judah Case. However, the 1956 act contains no
analogous provisions and thus, the judiciary has had to rely on principles of agency in most
of the cases or on the direct application of the indoor management rule with cases like
Lakshmi Ratan Cotton mills case as precedent. The recent Judgments in Kirlampud Sugar
Mills case84 also shows that the judiciary is still actively applying the law of agency in
conjunction with the rule of Indoor management rather expansively to provide benefits to the
third party. This position is similar to the stance taken by the Common law Judges in the
United Kingdom. The only difference is that in the Common law, this position is enforced by
law as we have already seen in Chapter 3, while in India, first it was due to section 86 of the
1913 Act and now, it is merely an extension of the judicial interpretation of Section 188 of the
Contract Act along with an expansive application of the Indoor Management rule

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Chapter 4.4:

Director as Fiduciary/Trustee or Agent? This seemingly harmless question becomes

extremely important in the Indian law because Indian law views agency as distinct from
trusteeship. 85 This distinction is required to be made if we are to claim that benefit accrued
to the company from the acts of the directors binds the company to the transaction. This kind
of a proposition creates an impression of trusteeship. However, Palmer strongly asserts that
Directors are mere agents of the company in the eyes of the law but also tries to clarify as to
when they may act as trustees. 86 He claims that while directors are the agents of the
company, they are elected by the shareholders to guard the their collective interests. In that
sense they act as trustees to the shareholders interests in the company. However, being in this
dualistic positon, they are not entitled to claim benefits from both sides. For Instance, he also
points out that limitation under the Trustees Act may not apply to them. But he final reaches
the conclusion that the true nature of the director is that of a fiduciary. 87 He has this
fiduciary relationship with the company and not the shareholders individually unless he is
negotiating the terms for the sale of issued shares of the company.

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Conclusion

This research paper upon evaluation of the Doctrine of Constructive Notice and Indoor
management has finally reached the conclusion that the doctrine have needlessly complicated
the simple matter which could have easily been resolved by a simple application of the rule of
Ostensible authority. The approach of Constructive Notice was so radically inclined to
support the Company that the reactions to it all came to support, almost phanatically, the third
parties. While Constructive Notice Blindly supported the company to an illimitable extent,
the rule of indoor management supported the third party just as blindly. Finally, law of
agency was required to repair that damage as was seen in various cases where ostensible
authority became a pre-requisite for the application of indoor management rule. This is the
position in common law until the sudden arrival of Companies act 1989, that suddenly
decided to introduce several conflicting provisions to abolish constructive notice. Almost, as
if giving a second thought, the English parliament never brought Section 711A into force or
there might have been Himalayan difficulties in interpretation and application of this
provision that bit on its own tail. Contract this common law muddle with the Indian law,
where the Companies act 1913 expressly endorsed the indoor management rule. Later,
although the 1956 act did not contain any such analogous principles, the Indian law seems to
treat the directors as fiduciaries or trustees of the company and so long as their acts are
benefitting the company, they bind the company. This principal is further enforced by the
provisions of the Indian Contract act, related to agency, wherein it was held that agents
power is to do anything lawful to achieve the object of agency and also that agents can do any
legal thing they like, if there is an emergency, to prevent losses to the principle. Thus, except
for a rare breed of cases where constructive notice was applied, Indian courts have been
immune to useless complications in the form of constructive notice and consequently Indoor
management.

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BIBLIOGRAPHY

Books Referred:
A Comparative Study of Companies Act 2013 with Rules and Companies Act
1956(Taxmann)
A Practical Guide to Depreciation under Companies Act 2013(Sanjeev singhal)

Website:
http://ravneetarora.blogspot.in/2013/08/doctrine-of-constructive-notice-and.html
https://www.researchgate.net/publication/262378371_Constructive_notice_and_Indoo
r_Management
http://www.lawteacher.net/free-law-essays/business-law/doctrine-of-constructive-
notice-business-law-essay.php

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