Constructive notice & Indoor management.pptx

Constructive notice & Indoor management

1. Constructive Notice & Indoor Management Dharmendra S Chawla SYLLB Roll No. 08

2. MOA & AOA are two main documents required for incorporation of a company MOA and AOA are to be registered with ROC Registrar of company is a public office Consequently, MOA & AOA of company registered with ROC becomes public document They are open and accessible to everyone Doctrine of Constructive Notice is a protection granted to company against outsiders dealing with the company Constructive Notice It is the duty of every person dealing with a company to inspect these documents before making any dealing with the company 2

3. Kotla Venkataswamy v. Rammurthy (AIR 1934 Mad 579) Does the plaintiff have any remedy for enforcing her mortgage deed? Whether the mortgage deed was duly executed and would the company be liable to the plaintiff? Facts – The plaintiff held a mortgage bond executed by company and it was signed by the Working Director and Secretary of the company. The plaintiff asserted that debt and interest were regularly paid by the company to the plaintiff. The company went into voluntary liquidation and the mortgaged property was sold. The plaintiff filed a suit in the lower court to enforce the right in the property, but the contention of the plaintiff was rejected by the court, and her subsequent appeal was filed before the Madras High Court. 3

4. The plaintiff contended that since the Managing Director was under prosecution for criminal charges, his signatures could not be obtained. The court rejected the contention of the plaintiff and stated that the mere fact that Managing Director was not available would not make the execution by Secretary and Working Director valid. The court further added that based on the facts of the case it is clear that the plaintiff had not read the MOA and AOA and thus he had no constructive notice that the documents required the signatures of Director, Secretary and Managing Director, which indicates the document was not duly executed and hence the plaintiff has no remedy. The court, while rejecting the contention of the plaintiff, stated that had the plaintiff read the MOA and AOA, she would have known that the mortgage bond required signatures of Managing Director, Secretary and Working Director. Judgement 4 Large image

5. The doctrine of indoor management is also known as “TURQUAND’S RULE” The doctrine of indoor management protects outsiders, who have entered into any contract with the Company If a company is said to enter into a contract, the obligations of following companies policies fall on the member of the Company and not on any party, who enters a contract with the company. The doctrine of indoor management is opposite to the doctrine of Constructive notice Indoor Management The doctrine presumes that every person has knowledge of the contents of the MOM, AOA and every other document such as special resolutions as it is filed with the ROC and available for public view. 5

6. Royal British Bank v. Turquand 6 E&B 327, All ER 435 5 Facts – The directors of Royal British Bank Ltd. issued a bond to Turquand and borrowed money from him. The Articles of Association authorized the directors to issue such bonds with the approval of a proper resolution. The directors were empowered by the Articles to borrow on bonds only such sums of money as the company in a general meeting resolves to borrow from time to time (through the passing of necessary resolution). However, no such resolution was passed for authorizing the issue of bonds. And the directors issued a bond to Turquand without the authority of a necessary resolution. Later, the repayment of the loan defaulted and the company was questioned to be liable. The claim was refused by the shareholders in the absence of the resolution 6 Whether the company is liable for the loan?

7. Regardless of the fact that the bonds were issued without being authorized under a resolution, it was determined that Turquand could sue on the bonds since he was entitled to presume that the resolution had been legally passed It was pointed out that an ordinary person dealing with a company is entitled to assume that the necessary compliance or delegation of powers to the officer(s) dealing on behalf of the company has been made. He does not need to inquire beyond what is apparent and obvious from the situation In this view, Lord Hatherley cited the principle of indoor management. He observed that “ Outsiders are bound to know the external position of the company, but are not bound to know its indoor management ” It was not the duty of Turquand to enquire whether the resolution had been actually passed or not Hence, he could sue the company on the bond and the bond was binding on the company Judgement 7 Large image

8. Knowledge of Irregularity T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd. Suspicion of Irregularity Anand Bihari Lal v. Dinshaw & Co. Forgery Ruben v. Great Fingall Ltd Acts falling outside apparent authority Kreditbank Cassel v. Schenkers Ltd. Exceptions of Indoor Management 8

9. Knowledge of Irregularity When an outsider who is entering into a transaction with a company has constructive or actual notice of the irregularity in relation to the internal management of the company, then He/she cannot seek remedy under the doctrine of Indoor Management T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd Facts – Company A had lent money to Company B for mortgaging its assets. The procedure for the same which was laid down in the Articles for such nature of transactions were not complied with. The Directors of both the companies were the same. Court Held – It was held by the Court that the lender was aware of such an irregularity and hence the transaction was not binding Where an outsider entering into a transaction with a company could discover the irregularities in the management of the company if he/she would have made proper inquiries, then he/she cannot seek remedy under the doctrine of Indoor Management Anand Bihari Lal v. Dinshaw & Co. Facts - The Plaintiff had accepted a transfer of a company’s property from the accountant of the company. Court Held – That the transfer is void in nature as such a transaction was beyond the scope of the accountant’s authority. It was the duty of the plaintiff to check the power of attorney that was executed in favour of the accountant by the company. 9 Suspicion of Irregularity Exceptions of Indoor Management

10. Forgery It is pertinent to note that the Doctrine of Indoor Management does not apply in cases where an outsider relies on a document which is forged in the name of the company. A company can never be held liable for the forgeries committed by its officers. Ruben v. Great Fingall Ltd Facts – The Plaintiff was a transferee of the share certificate issued under the seal of the defendant company. The certificate was issued by the Company’s secretary who has forged the signature of the two directors of the company and had affixed the seal of the Company. Court Held – It was held by the court that the doctrine of Indoor Management has never extended to cover a forgery. 10 Exceptions of Indoor Management Acts falling outside apparent authority Acts done by an officer of a company which are beyond the scope of its apparent authority will not make the company liable for any of the defaults caused by the officer. Kreditbank Cassel v. Schenkers Ltd. Facts – The branch manager of the company had endorsed a few bills of exchange in the name of the company in favour of a payee to whom he was personally indebted. The Company did not give him any authority to do so. Court Held – It was held by the court that the company was not bound. Additionally, it was also stated that if the officer of the company commits fraud under his apparent authority on behalf of the company, then the company will be held liable for the act of fraud committed by the officer.

11. Important Differences The Doctrine of Constructive Notice It protects the company against the outsider. It is confined to the external position and affairs of the company. The memorandum and articles of association of the company are public documents. They must be registered with the Registrar of Companies. These are open to public and third parties to access. Third persons, who have no notice of an irregularity or want of authority, if they try they could know about that irregularity or want of authority, will not be protected on the principle of ‘constructive notice’ It operates as an estoppel against the outsider. It is based on negative concept. 11 The Doctrine of Indoor Management It protects outsider against the company. It is confined to the internal position and affairs of the company. The internal affairs need not be registered, They are not open to public and third parties. Third persons, who have no notice to any irregularity or want of authority, will be protected on the principle called the ‘Turquand Rule’. It mitigates the effects of the “Doctrine of Constrictive Notice”. It is based on positive concept.

12. Thank You 12