A company’ articles of association become public documents on registration with the registrar of companies. These documents are available for public inspection in the Registrar’s office on payment of such fees as may be prescribed.
Every person who deals with the company is deemed to know the contents of these documents. This is known as the “Doctrine of Constructive Notice” or ‘Constructive Notice of the company’s constitution’. It is presumed that the individuals dealing with the company have read these documents and understood their proper meaning.
The articles of association are open and accessible to all. It is the duty of every person dealing with the company to inspect these documents and see that it is within the powers of the company to enter into proposed contract. Likewise, special resolutions when registered with the registrar become public document so that an outsider is in notice of their contents in the same way as he is of the memorandum and articles of association.
Presumption that outsider has read the articles of association was observed in Mahoney vs. East Holyfield Mining Co. as follows:
“But whether he actually read them or not it will be presumed that he has read them. Every joint stock company has its memorandum and articles…open to all who are minded to have any dealings
whatever with the company and those who so deal with them must be effected with notice of all that is contained in these two documents”
The doctrine of Constructive notice of the articles of association however is not a positive doctrine but a negative one. It does not operate against the company.
It operates only against an outsider dealing with the company. It prevents him from alleging that he did not know that the articles rendered a particular act ultra vires the company.
Doctrine of indoor management
The doctrine of indoor management is an exception to the rule of constructive notice. According to the rule of constructive notice, a person dealing with the company is deemed to have knowledge of the articles of the company. If he enters into a transaction with the company which is ultra vires, he cannot treat the transaction as binding on the company.
The doctrine of indoor management on the other hand argues that outsiders dealing with the company are entitled to assume that everything had been regularly done so far as its internal proceedings are concerned. The doctrine had its origin in a famous case, “Royal British Bank vs. Turquand”.
Case Law: Royal British Bank vs. Turquand
The directors of the Bank issued a bond to Mr. Turquand. The articles provided that the directors had the power to issue bond if authorized proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that persons dealing with the company are bound to read the registered documents and to see that the proposed dealings are not inconsistent therewith, but are not bound to do more. They need not inquire into the irregularity of internal proceedings.
Exceptions to The doctrine of indoor management
The doctrine is however, subject to the following exceptions:-
(a) Knowledge of irregularity: – A person who deals with the company and who has knowledge of the irregularity in its internal management in connection with the subject matter of his dealings cannot claim the benefit of the rule in Turquand’s case. Thus where company A lends money to company B on a mortgage of its assets and the procedure laid down in the article for such a transaction was not complied with and the directors of the two companies were the same, the mortgage is not binding. It may be presumed that company A had notice of irregularities through its directors.
Similarly in Howard v. Patent Ivory Co. the directors were empowered to borrow up to 1000 pounds and such further sums as the company in general meeting might authorize. Without such consent, they issued to themselves debentures for sums in excess of 1,000 pounds. It was held that as they had knowledge of irregularities in the internal proceedings of the company, the company would be liable for the 1,000 pounds only. Sums borrowed in excess of this were held to be invalid.
(b) Negligence: – A person cannot claim the benefit of the rule in Turquand in circumstances under which he would have discovered the irregularity if he had made proper inquiries. Further, where circumstances surrounding the transaction are suspicious, and therefore invite inquiry, the outsider cannot claim the benefit of this rule.
(c) Forgery: – The rule in Turquand’s case will not apply where a document on which the person seeks to rely on is a forgery.
Case Law: Ruben vs. Great Fungall Consolidated Co.
Ruben lent a company a sum of money on the security of a share certificate. The secretary had forged the signatures of the two directors and had affixed the seal on the certificate without authority. The company refused to register the share certificate. Ruben claimed damages relying on the Turquand’s rule.
It was held that he could not do so because the rule did not apply where the document was forged.
(d) Acts outside the apparent authority: – The rule in Turquand does not apply where a person acting on behalf of the company exceeds any actual or ostensible authority given to him. A person who enters into a transaction with a company official who has acted beyond official powers will not be protected the rule in Turquand case.
Case Law: Anand Lal vs. Dinshaw & Co. (1942)
P accepted a transfer of company’s property from its accountant. Since such transaction is apparently beyond the scope of the accountant’s authority it was void.
(e) No knowledge of the contents of the articles of association: –
A person who has not actually read the articles and who was not at the time he entered into the contract, aware of their content cannot seek to rely on the doctrine of indoor management.
The doctrine of indoor management is based on the principle of estoppels and therefore cannot be invoked in favor of a person who has not consulted the company’s memorandum and articles.
No one can rely and act upon something of which he was in fact completely ignorant.