Case Study- Two Legal Doctrines that everyone should know

CASE STUDY: Mr Agarwal is in the verge of signing a Contract with a Multinational Company. His adviser told him to be very careful and understand “Doctrine of Constructive Notice” and “Doctrine of Indoor Management” before closing the deal. He is clueless about such Doctrines and approaches Taxmantra to understand the same

 

Doctrine of Constructive Notice is more or less an unreal doctrine. It does not take notice of the realities of business life. However, 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 and he cannot claim relief on the ground that he was unaware of the powers of the company in case of ultra vires of the company.

Doctrine of Indoor Management is opposed to that of Doctrine of constructive notice. This doctrine protect the outsiders against the company.

 

What is Doctrine of Constructive Notice?

The Doctrine of Constructive Notice provides that, people while dealing with a company are presumed to have read “public documents” such as Memorandum of Association (MOA), Article of Association(AOA) and any additional documents that are publicly filed with the registrar and understood its contents so that the outsiders cannot hold the company liable for any irregularities in dealing. The memorandum and articles of association are specifically considered as public document as every company needs to register it with the Registrar of Companies. Since the office of the Registrar is a public office so consequently the memorandum and articles become public documents. They are open and accessible to all. Hence it is therefore, the duty of every person dealing with a 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 the same position as if he had read them. He will be presumed to know the contents of those documents.

In other words, 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 a constructive notice not only for the memorandum and articles, but also for all the documents, such as special resolutions [Section 117 of Co act 2013] and particulars of charges [Section 77 of Co act 2013] which are required by the Act to be registered with the Registrar

Constructive notice is an idea in the legal world that a person may be notified by public posting of a pending legal action. For example when a court is unable to directly reach someone and publishes a summon in the public newspaper. This is considered as Constructive notice and the rule of Doctrine of Constructive notice says the persons dealing with company should not only read but also to understand them according to their proper meaning, not merely the company’s powers but also those of its officers.

 

Verdict of the case 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 understand them properly.

Thus, Memorandum and Articles of the company are presumed to be notice to the public. Such a notice is called constructive notice.

 

What is Doctrine of Indoor Management?

The Doctrine of Indoor Management means that a company’s indoor affairs are the company’s problem. Therefore, this rule of indoor management is important to people dealing with a company through its directors or other persons. This common law rule holds that parties dealing with a corporation, acting in good faith and without knowledge of any irregularity, are entitled to assume that a corporation’s internal policies and proceedings have been followed and complied with. In fact in Royal British Bank v Turquand (1856) case it was held that people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. 

The rule will not apply if there is knowledge of irregularity by the aggrieved party, negligence, act which is void ab initio, and acts which are beyond the scope of apparent authority. Hence, the Doctrine of Indoor management protects outsiders against the actions of a company. This doctrine also is a possible safeguard against the possibility of abusing the doctrine of constructive notice as the latter seeks to protect the company against the outsider; the former operates to protect outsiders against the company. 

 

Why is  Doctrine of Constructive Notice and Doctrine of Indoor Management so important before signing any contract with MNCs?

It is important to note that the doctrine of constructive notice does not allow outsiders to have notice of the internal affairs of the company and if a person enters into a contract which is beyond the powers of a company as enumerated in its memorandum or outside the authority of directors or other officers as written in articles then he has no right under the said contract against the company. Therefore, the rule of indoor management is important for the people dealing with a company through its directors or other persons. They can assume that the members of the company are performing their acts within the scope of their apparent authority. If an act which is valid under the articles, if done in a particular manner, then the outsiders dealing with the company can assume that the directors or other officers have worked within their authority. Hence, the doctrine of indoor management means that a company’s indoor affairs are the company’s problem and it protects outsiders against the company.

 

If you have any query or want us to assist you in drafting the Agreement feel free to write to us at [email protected] and we shall be glad to assist.

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