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Injunctions under the Specific Relief Act, 1

Doctrine of Indoor Management and Constructive Notice.

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What is a company?

A company can be defined as a legal entity formed by a group of people or by an individual to carry on business. The organisation of the company may vary depending upon the tax, financial ability and jurisdiction. The different structures of a company: Partnership, proprietorship or corporate usually depends upon the business the company is conducting. Further, the classification can also happen upon private or public ownership. 1

What is the Article of Association and Memorandum of association?

Memorandum of Association abbreviated as MOA is the root document of a company and states all the basic and essential details about the company. Article of association abbreviated as AOA states all the rules and regulations followed and stated by the company. All the shareholder’s rights are also mentioned in the above documents. For the registration of a company, these documents are very important. 2

What is the Doctrine of Constructive Notice?

According to this doctrine, after a company’s registration under the Companies Act, 2013 the article and memorandum of association are considered to be public documents. By paying a minimal fee, people can get access to these documents of a certain registered company. This is mentioned in Section 399 of the companies Act, 2013. From this, it is inferred that every person who is dealing with the company has read, understood and has knowledge of these public documents. This is to ensure that no person dealing with the company shall hold the company liable for an activity mentioned in the article and memorandum of association.3This is because of a reasonable assumption made by the law that the person dealing with the company has read its public documents. Even if the person in actuality did not read the documents he cannot use it as a defence. 

What is the Doctrine of Indoor Management?

The doctrine of Indoor management can be considered as an exception to the above-mentioned doctrine. According to the Doctrine of Constructive notice, the public has access to only the public documents i.e. which were used for the registration of a company and not the internal details. It is impossible for an outsider or the general public to know the internal details of a company. Hence, it is a reasonable assumption made by the general public that any activity mentioned in the Article and Memorandum of associates is taking place following all the required procedures. This Doctrine tries to convey a fact that indoor operations of a company are solely the company’s burden. 4 This Doctrine initially came into existence with the:

Royal British Bank v Turquand 5  

In this case, directors of a company borrowed money from the plaintiff. In the memorandum of associations, it was mentioned that the company cannot borrow money without the assent from the general meeting. Since the directors borrowed without the assent from the general meeting, they declared themselves not liable to repay the money borrowed. Court held that it was a reasonable assumption of the plaintiff that the directors borrowed the money post the assent from the general meeting. Further, it held that the directors are liable to repay. 

Mahoney V. East Holyford Mining Co.: 6

According to the Article of this company, it was stated that 2 of 3 directors should sign a cheque followed by the secretary. However, one of the directors who signed the cheque was not appointed following all the procedures. The House of Lords, in this case, stated that a[pointment of the director is an internal affair. Third-party has reasonably assumed that the director was appointed legally and cashed the cheque. This case gave a firm standing to this Doctrine. 

What are the Exceptions to the Doctrine of Indoor Management?

  1. Knowledge of irregularity:

This doctrine does not apply when the person has knowledge regarding some kind of default in the operation. Further, if the person actually knew the complete irregularity he/she will also be considered liable for that irregularity.  This can be seen in Howard V. Patent Ivory Co.7. According to the company rules, directors cannot borrow more than 1000 pounds without consent from the general meeting. However, the directors have borrowed 3500 pounds from another director. Court held that they were liable for only 1000 pounds as the director who lent the money had access to internal information. 

  1. Forgery:

According to this exception, if a person enters a transaction in reference to a document which is forged, he cannot be held liable. Forgery cannot be exempted under any case. The company cannot be held responsible for the forgeries committed by its employees. However, if the documents were void ab initio the question of forgery does not arise. In Rouben V. Great Fingall Consolidated8, the secretary of the company forged the signatures of the two directors to issue a certificate as mentioned in the article and memorandum of association. Court held that the person who received the certificate cannot take advantage of the same as this transaction was void ab initio. 

  1. Negligence: 

If an individual does not conduct an enquiry to find out the truth about any suspicion, he/she cannot use this doctrine. If the irregularity could be figured through minimal effort one cannot approach the court through this doctrine. Due-negligence on part of the individual rules out his chance of using this doctrine. However, this exemption is available only when the question of the power of the authority arises. It is not applicable when the question is related to the appointment of the authority itself. This was explained by the Kerala High court in Varkey Souriar V. Leraleeya Banking Co. Ltd.

Does the Doctrine of Indoor Management apply to Government Authorities?

It is noted that any notification taken by the government should follow the procedure stated under Rules of Business Under Article 116(3)/77(3). If the procedure is not followed accurately, the notification issued is void ab initio and this doctrine cannot be used9. This was seen in the case of MRF Ltd. v. ManoharParrikar.

Conclusion:

A company can be defined as a legal entity formed by a group of people or by an individual to carry on business. Memorandum of Association abbreviated as MOA is the root document of a company and states all the basic and essential details about the company. Article of association abbreviated as AOA states all the rules and regulations followed and stated by the company. For the registration of a company, these documents are very important. According to the doctrine of constructive notice, after a company’s registration under the Companies Act, 2013 the article and memorandum of association are considered to be public documents. This is to ensure that no person dealing with the company shall hold the company liable for an activity mentioned in the article and memorandum of association. The doctrine of Indoor management states that since the general public does not have access to the internal affairs of a company, it is a reasonable assumption made by the general public that all the activities mentioned in the AOA and MOA are following the proper procedure. However, there are exceptions to this doctrine: forgery, knowledge of irregularity, negligence. In any of these three cases, a person cannot use this defence. Case laws regarding the same are mentioned above. It can be concluded that the Doctrine of Constructive Notice is to safeguard the company and Doctrine of Indoor Management is to safeguard the general public. 

Endnotes

1.  Will Kenton, Company, INVESTOPEDIA, ( 9 July, 2019), https://www.investopedia.com/terms/c/company.asp

2.  Surbhi, Difference between Memorandum and Article of Association, KEYDIFFERNCES, (26 July, 2018), https://keydifferences.com/difference-between-memorandum-of-association-and-articles-of-association.html

3.  Doctrine of constructive notice and indoor management, BBAMANTRA, (23 May, 2020), https://bbamantra.com/constructive-notice-indoor-management/

4.  Doctrine of Indoor management, TOPPR, ( 23 May, 2020), https://www.toppr.com/guides/business-laws/companies-act-2013/doctrine-of-indoor-management/

5.  Royal British Bank v Turquand, (1856) 6 E&B 327.

6.  Mahoney V. East Holyford Mining Co., (1875) LR 7 HL 869.

7.  Howard V. Patent Ivory Co., (1888) 38 Ch D 156.

8.  Rouben V. Great Fingall Consolidated, (1906) UKHL 616. 

9.  Sushmita Singh, Doctrine of Indoor Management, LEGALSERVICESINDIA, (23 May, 2020), http://www.legalserviceindia.com/legal/article-109-doctrine-of-indoor-management.html

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Anusha Nookala

Student, Symbiosis Law School Hyderabad

Anusha Nookala is a student at Symbiosis Law School, Hyderabad currently pursuing BBA LLB. She is a corporate law enthusiast.  She is an effective and attentive speaker and listener, highly organized and detail-oriented individual. For any Clarifications, feedback, and suggestion, you can reach her at l.anusha@student.slsh.edu.in

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