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H.

P NATIONAL LAW UNIVERSITY,


SHIMLA

Assignment
COMPANY LAW

Submitted To
Dr. ALOK KUMAR

Submitted By
KUNAL MEHTO

Roll no. – 16
BA.LLB.(HONS.) –V SEMESTER
CONCEPT OF CONSTRUCTIVE NOTICE AND ITS
IMPACT ON THE COMPANY AND THIRD PARTY

Introduction

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 away with this doctrine completely.

Constructive notice is the legal fiction that signifies that a person or entity should have known,
as a reasonable person would have, even if they have no actual knowledge of it. For example,
if it is not possible to serve notice personally then a summons may be posted on a court house
bulletin board or legally advertised in an approved newspaper. The person is considered to
have received notice even if they were not aware of it.

In companies law the doctrine of constructive notice is a doctrine where all persons dealing
with a company are deemed to have knowledge of the company's articles of association and
memorandum of association. The doctrine of indoor management is an exception to this rule.
In India the rule was never too strictly applied but continues to persist.

Constructive Notice

According to the doctrine of constructive notice, every outsider dealing with a company is
deemed or presumed to have notice of the contents of the memorandum and articles of
Association, which are public documents and therefore open to inspection. They can be
inspected by ‘any person’1. This kind of presumed notice is called ‘constructive notice’.

1
SECTION 399 OF COMPANY ACT, 2013
After being registered with the Registrar of Companies, the
memorandum and articles become public documents and may be inspected by any on payment of
the prescribed fee. On account of it, every person dealing with the company is expected to have
read and understood the Contents of the documents before making any contract with the
company and if he does not he will have to bear its consequences. Thus, a person dealing with a
registered company is presumed not only to have read the public document like memorandum,
articles and other regulations which form the constitution of the company but also to have
understood them according to their proper meaning.2 Whether he has read these documents or
not, he is presumed to have notice of their contents.3
In the case of Mahony v. East Holyford Mining Co.4 Lord Hatherby said “Every joint stock
company has its memorandum and articles association open to all who are minded to have any
dealings whatsoever with the company, and those who so deal with them must be effected with
notice of all that is contained in those two documents.”
It is to be noted that a person dealing with a registered company is presumed not only to have
the notice of the company’s powers but also the Powers of its officers.5
It is also notable that such presumption cannot be inferred in respect of all kinds of documents,
registered with the company; for the purpose such documents may be divided into two groups:
(a) The documents affecting the powers of the company and its agents, and
(b) Other documents, i.e., the documents not affecting the powers to the company and its
agents.
A person dealing with a registered company is presumed to have read and understood the public
documents affecting the powers of the company and its officers, e.g. memorandum, articles and
special resolution, etc, but cannot be presumed to have read and understood the documents not
affecting the powers of the company and its officers, e.g., balance sheet, accounts and return etc.

2
GRIFFITH V. PAGET, 6 CH. D. 517 OAKBANK OIL CO. V. CRUM, 8 APP. CAS. 65; G.I. & C. COMPANY, L.R. 7 EQ. 29;
COUNTRY GLOUCESTER BANK V. RUDRY, ETC. CO., (1895) 1 CH. 629; OWEN AND ASHWORTH’S CLAIM, (1901) CH.
115
3
KREDJT BANK CASSED V. HENKERS, (1927) 1 K.B. 826.
4
(1875) L.R. 6 FT.L. 869.
5
BARON PARKE IN RIDELY V. PORTSMOUTH GRINDING CH., (1848) 2 EX. CH. 711.
An application of the doctrine of constructive notice is found in the case of Kotla Venkata Swami
V. Ram Murthi,6 also. In this case, the articles required all the deeds to be signed by the
managing director, the secretary and a working director on behalf of the company but a deed of
mortgage was singed only by the secretary and a working director and the deed was accepted by
the plaintiff. The plaintiff was not entitled to enforce it because if she (the plaintiff) had read the
articles, she would have discovered that a deed such as she took required execution by three
specified officers of the company and would have refrained from accepting a deed inadequately
signed.

Statutory reform and Constructive notice


In the opinion of some legal experts the doctrine of constructive notice is considered as
an unreal doctrine. This doctrine is not based on realities of business of life. A company is
known to the public at large through its officers and not through its Memorandum and Articles of
Association. The doctrine of constructive notice has been abolished by Section 9 of the European
Communities Act, 1972. However, Section 9 of the said Act is now incorporated in Section 35 of
the (English) Companies Act, 1985.
The effect of new Provision has been shown in TCB Ltd. Gray.7Where
a debenture issued by a company was not signed by the director personally as required by the
terms of Articles, in fact it was signed by a solicitor as attorney of a director. The Articles of
company contains the provision that “every instrument to which the seal shall be affixed shall be
signed by a director. It was held that even so the company was held liable. The Court while
considering the effect of new provision said that before this enactment was enforced a person
dealing with the company was required to go through the Memorandum and Articles of the
company to satisfy himself that the transaction was within the corporate capacity, but the
scenario has been changed by virtue of Section 9(1). This Section 9(1) states that good faith is to
be presumed and that the person dealing with the company is not bound to enquire.
The doctrine of constructive notice has not been taken so seriously by the courts in India.
For illustration, in Dehradun Mussouri Electric Tramway Co. v. Jagrnandardas,8 as per articles,
the directors could delegate all their powers except the power to borrow. Even so an overdraft
6
A.I.R. 1934 MAD. 579.
7
FINANCIAL TIMES, NOV. 27, 1985 1986 JBL 10
8
A.I.R. 1932 ALL. 141
taken by the managing agents without approval of the board was herd to be binding. The
Allahabad High Court said that such temporary loans must be kept beyond the scope of relevant
provision.

Effects.-
The effect of the doctrine of constructive notice may be summed up as follows:

1. Ultra Vires Acts :-


According to the doctrine of constructive notice, every person dealing with the company is
presumed to have the knowledge of the contents of memorandum and therefore if an act is ultra
vires the company, he cannot claim relief on the ground that he was unaware of the fact that the
act is beyond the memorandum (i.e., ultra vires the company). In England, S. 9(1) of the
European Communities Act, 1972, has changed the position with effect from 1-1-1973 to the
effect that a transaction which is ultra vires the company will be ‘binding on the company and
the company cannot plead that it has acted ultra vires or the transaction is ultra vires provided the
outsider dealing with the company has acted in good faith and the transaction has been decided
upon by the company’s board of directors. However, there is no such legislation in India and
consequently in India, the outsider dealing with the company is presumed to have the knowledge
of the contents of the memorandum and therefore if an act is found to be ultra vires, he cannot
claim relief on the ground that he had no knowledge that the act was beyond the memorandum
and, therefore, ultra vires.

2. Acts beyond the authority of directors.—


If this lack of authority of the directors or other agents of the company is evident from the public
documents like articles and other regulations, the person dealing with the company will be
presumed to have the notice of the lack of authority and therefore he cannot hold the company
bound by the act of the directors (or other agents). For example, if the articles require a bill to be
signed by two directors, a person dealing with the company is under duty to see that it has been
signed by the two directors, otherwise he cannot enforce the bill against the company. But if the
lack of authority of the directors or agents is not evident from the public documents, he cannot be
presumed to have the notice of the lack of authority and therefore he can hold the company
bound by the act of the directors or other agents if he honestly thinks that the director or agent
with whom he is negotiating is authorized to act on behalf of the company. For example, where
the articles require the directors to take the consent of the shareholders by ordinary resolution for
exercising thereof borrowing powers but they borrow money without taking such consent the
borrowing will be binding on the company if the creditor has no notice of the fact the directors
negotiating with him have not taken such consent.

3. Inconsistent agreements -
Person dealing with the company is presumed to have the notice of the contents of articles and
consequently he cannot make a contract with the company which purports to override any rights
created by the articles.
The doctrine of constructive notice protects the company but not the outsiders dealing with the
company. Sometimes the doctrine creates much hardships for the outsiders. They are presumed
to have the knowledge of the public documents like the memorandum of the company but in
practice it is very difficult and time consuming to have the complete knowledge of them before
making any contract with the company. Thus, the doctrine is inconvenient and unreal. It has
failed to take note of the realities of business life9. On account of its evils the doctrine has not
been taken seriously both in U.K. and India10. In England the doctrine has been abrogated by the
European Communities Act. 1997. 11
The doctrine of constructive notice is subject to the following doctrines :
I. Doctrine of Indoor Management
II. Doctrine of Holding out

I. Doctrine of Indoor Management


The doctrine of constructive notice is subject to the doctrine of indoor management. According
to the doctrine of indoor management, an outsider dealing with the company is required to see

9
CHARNOEK COLLIERIES LTD. V. BLIOLANATH, (1912) 39 LLR. CAL. 810
10
DEHRA DUN MUSSOORIE ELECTRIC TRAMWAY CO. V. JAGRNUNDARDS, A.1.R. 1932 ALL 141
11
S. 99 OF THE EUROPEAN COMMUNITIES ACT, 1972
that the authority of dealing had been given by the articles to the person with whom the outsider
is dealing but he cannot be assumed to do anymore; he is not expected to enquire whether the
proper procedure has been followed for the delegation of the authority to the person with whom
the outsider is dealing;12 he may be presumed to have the knowledge of the constitution of the
company but not what may or may not have taken place within indoors which are closed to
him.13 The doctrine entitles the outsider dealing with the company to assume that the things have
been done in accordance with the provisions and proceedings stated in the articles. Thus, every
outsider is entitled to assume the regularity of internal proceedings unless he has the knowledge
of the irregularity. The doctrine implies responsibility on the person in charge on the
management of the company to see that all the rules of internal management of a company are
complied with and the company will he liable to the outsider for the ac of his directors or agents
even if the internal formalities or internal procedures have not been complied with. An example
will make the point more clear. If the articles give power to the managing agent of the company
to borrow money with the approval of directors but the managing agent borrows without such
approval, the lender will not be affected by such irregularity, he may presume that before
borrowing, the managing agent has taken the approval of the directors and consequently the
company will be bound by the loan. However, if the lender has the knowledge of the irregularity,
the position would be quite different. The lender will not be protected the position would be
quite different. The lender will not be protected and consequently the loan will not be binding on
the company.14
The object of this doctrine is to protect the outsider with a company. The doctrine is
based on business convenience for business could not be carried on if everybody dealing with the
apparent agents of a Company was compelled to call for evidence that all internal regulations
had been duly observed.15Since memorandum and articles are public documents open to public
inspection, an outsider is presumed to have the knowledge of their contents, but the details of
internal procedure are not open to public inspection and therefore it would be unfair if an

12
BIGGER STAFF V. ROWATTS WHARF,(1896) 2 CH. 93.
13
PACIFIC COAST COAL MINES V. ARBUTHNOT, (1917) A.C. 607.
14
BALASARA WATHI LTD. V. A. PARMESHWAR, A.LR. 1957 MAD. 122.
15
PALMER’S COMPANY LAW, P. 36.
outsider dealing with the Company is presumed to have the knowledge of the details of internal
procedure (i.e. the rules of internal management).
The doctrine was first developed in the case of Royal British Bank v. Turquand.16The
doctrine of indoor management is also known as rule in Turquand’s case. In this case, the
directors were empowered by its registered deed of settlement to borrow on bond such sums as
should be authorized by a general resolution passed at general meeting of the company. The
company borrowed money and issued a bond signed by two directors under the seal of the
company. When the lender sued on the bond, the company contended that there had been no
resolution authorizing the loan and therefore the bond was given without authority (i.e., the
borrowing was unauthorized) and consequently it was not binding on the company. The Court
rejected the contention of the company and held the company bound by the loan (or bond).
Having ascertained that borrowing might be authorized by a resolution of the company, the
plaintiff (the lender) had right to assume that the necessary resolution had been passed. The
doctrine of indoor management developed in the case of Royal Bank v. Turquand17 is based on
reason and justice. It has been applied by the courts in a number cases to secure justice.

The cases in which the doctrine has been applied may discussed under the following heads.18

(a)Cases where director’s title to office is defective


Any transaction entered into or act done on behalf of company be de facto directors will be
binding on the company even though appointment of such directors is found defective provided
the outsider dealing with the company has no knowledge of it because the outsider is entitled to
presume that the directors dealing with him have been properly appointed.19 Even if de facto
directors have never been appointed20 their act done on behalf of the company will be binding on

16
(1856) 6 E.P. & B. 327.
17
(1856) 6 E&B 327
18
PENNINGTON’S COMPANY LAW (THIRD ED.) P. 114
19
PUDURNJEC & CO. V, MOOS, A.I.R. 1926 BOM. 28; P.C. MITRA V. ROAD OIL (INDIA) LTD., (1929) I.I..R. 57 CAL.
1101
20
SREE MINAKSHI MILLS V. CALLIANJEE, A.I.R.1935 MAD,. 799.
the company if they are in control of business of the company and the outsider is unaware of the
fact that the director have been appointed.21

(b)Failure to hold properly convened meetings


Directors are required to exercise their power collectively by resolving at properly convened
meetings of the board of directors that acts shall be done in the name of the company. But
sometimes it is found that a transaction entered into by one or some of the directors in the name
of the company has not been approved by a resolution passed at a regularly convened board
meeting. We will consider here the fate of such transaction.
In short the position of law appears to be that the act done on behalf of company by the directors
will be binding on the company even if the meeting of the Board was irregular as no present or
proper notice of the meeting of the board was given in advance to each director, 22 provided the
outsider dealing with the company is still protected because he is presumed to have the
knowledge of the number of directors who from quorum, but he is not required to see that the
number of directors in fact attended the board meeting23 and this is logical because even though
the outsider knows what number of directors should attend he had so means of ensuring that
number actually did attend.24
Similarly an act done by the directors in the name of the company will be binding on the
company even if the act has been done without a board meeting being held at all, provided the
outsider dealing with the company has no knowledge of it.25 Its reason is that the outsider has no
means to discover whether a board meeting has been properly held. Thus a debenture, which was
issued under the seal of the company, was held binding on the company, even though no board
meeting to sanction its issue was held at all.

(c) Disregard of limitations on the directors authority 26

21
MAHONY V. EAST HOLYFORD MINING CO., (1875) L.R. 7 H.L. 869.
22
BROTONE V. LA TRINIDAD, (1887) 37 CH. D. 1
23
PRINCE OF WALES ASSURANCE SOCIETY V. ATHENAEUM ASSURANCE SOCIETY, (1858) 3 C.B.N.S. 756, DAVIS V.
R. BOLTOM & CO., (1894) 3 CH. 678.
24
PENNINGTON, ‘COMPANY LAW’, (THIRD EDN.) P. 118
25
DAVIS V. BOLTOM & CO. (1894), 3 CH. 678: DUCK V. TOWERING GALVANIZING CO. (1901) 2 KB. 314.
26
P.S. SANGAL, ROYAL BRITISH BANK V, THRQUAND & INDIAN LAW, (1964) 2 COMP. L.J. 173.
The doctrine of indoor management also protects an outsider dealing with the company in a
condition where the directors have authority under the memorandum and articles of the company
with the limitation that they should exercise their authority if certain conditions are fulfilled or a
special procedure is followed but they exercise their authority without fulfilling the conditions or
following the specific procedure. In other words, the act done by the directors who have
authority to do the act after fulfilling certain conditions or following a specific: procedure will be
binding on the company even if the conditions have not fulfilled or the procedure has not been
followed, provided the outsider has o knowledge of the fact that the conditions have not been
fulfilled or the procedure has not been followed. Its reason is that the outsider may be presumed
to have knowledge of the conditions required to be fulfilled or procedure required to be followed
before the exercise of the power but he cannot be presumed to have 0wlcdge of the fact that the
conditions have not been fulfilled or the procedure has not been followed. He has no means of
knowing that the conditions or procedure prescribed by the memorandum or articles have
actually been adhered or not. The best illustration is found in Turquand’s case which facts have
been stated above.
In Hampshire Land Co.27,’ it has been held that if the directors have authority to borrow
money on behalf of the company up to a certain limit specified in the articles and also in excess
of the limit if a general meeting of the company consents, the borrowing in excess of the
specified limit will be on the company even if the necessary consent has not been taken provided
the lender is unaware of the fact that the necessary consent has not been taken. Its reason is that
the lender is entitled to assume that the necessary consent has been taken before the borrowing in
excess of the limit.
In British Thomson Houstom Company Ltd. v. Federal European Bank Ltd.28, by articles, the
directors were empowered to delegate one or more or their own body such of the powers
conferred on the directors as they consider requisite for carrying on business of the company and
to determine who should be entitled to sign on the company’s behalf bills, receipts, acceptances,
contracts and documents. N. Pal, one of the directors, executed a guarantee. The company
contended that the director had no authority to execute the guarantee and therefore it was not
bound by it. The Court held that the company was liable on the guarantee because the plaintiff

27
(1896) 2 CH. 743.
28
(1932) 2 K.B.77
was entitled to assume that N. Pal had been authorized by the directors to sign a contract on
behalf of the company.

Exceptions to the doctrine of indoor management


The doctrine of indoor management or rule in Turquafld’s case does not apply in the conditions
mentioned below:

1. Notice of irregularity:
The doctrine of indoor management or the rule of Turquand’s case does not apply if the party
affected by an irregularity may be taken to have ow1edge of such irregularity if he was himself a
party to the internal management.
In Howard v. Patent Ivory Manufacturing Co29. the articles empowered the directors to hot-row
up to pounds 1000 and such further sums as the general meeting might authorize. The company
borrowed pounds 3,500 from the directors without the authority of the general meeting and
issued debentures to them. The Court held that the debentures were valid to the extent of pounds
1000 only. Since the directors were themselves party to the internal proceedings they were taken
to have the notice of the fact that the necessary resolution had not been passed and therefore they
could not be protected by the rule in Turquand's case (or the doctrine of indoor management).
However, in Hely-Hutclunson V. Brayhead Ltd.30 the above men principle, that a person who is a
party to the internal management will be deemed to have the knowledge of the irregularity of
internal proceedings (if any), has not been strictly followed. The Court held that a person cannot
be deemed to have the knowledge of the irregularities of internal management merely because he
is a director and consequently a part of the internal machinery.
However, the view that a person who is himself a part of internal, machinery should be
deemed to have knowledge of the irregularity of internal management appears to be more correct
and practical.
The principle that a person dealing with the company will not be protej1 he has
knowledge of the irregularity, is not confined only to persons dealing with the company but
extend to the cases where one company has dealing with another company. Thus, where a

29
(1888) 38 CH. P. 156.
30
(1966) 1 Q.B. 549.
company dealing with another company affected by the irregularity in the internal management
of the other company, it cannot be protected under the rule in Turqitand’s case if it had notice of
the irregularity.31Ordinarily, a company is not automatically deemed to have the knowledge of
the irregularity in the internal management of the company with which it is dealing merely
because it has a common officer (as director or secretary) with that other company, but the
company may be presumed to have the knowledge of the irregularity if the common officer had
some duty imposed upon him to communicate the knowledge to the other company, and had
some duty imposed upon him by the company which is alleged to be affected by the notice to
receive the notice.32
In Re, Hampshire Land Co33., the directors of a company were empowered to borrow
money on behalf of the company but not beyond a certain limit without the consent of a general
meeting. The directors borrowed beyond this limit and a general meeting gave the required
consent, but the notice summoning the meeting did not state that the borrowing to be authorized
was beyond the limit. The secretary of the company borrowing the loan was also the secretary of
the society lending the company and he knew of the irregularity. The Court held that the
knowledge acquired by the secretary as officer of the company could not be imputed to the
Society because he was under no duty to communicate it to the society and no duty was imposed
on him by that society to receive it. Thus, the borrowing was binding on the recover it company
and society (lender) was entitled to recover it.

2. Suspicious circumstances inviting inquiry:


The doctrine of indoor management does not apply where the person seeking to rely on it
is put on inquiry in circumstances under which he would have discovered the irregularity if he
had made inquiries.

31
T.R. PRATT LTD. V. SASSON & CO. LTD., 37 BORN. L.R. 978.
32
RE, MARSEILLES EXTENSION RLY., (1971) L.R. 7 CH. I6I; GALE V. LEWIS, 9 Q.B. 730 RE, HAMPSHIRE
LAND CO., (1896) 2 CH. 743; YOUNG V. DAVID PAYNE & CO., (1804) 2 CK 608; RE, FENWICK STOBART
& CO., (1909) 1 CH. 506.
33
(1896) 2 CH. 743; SEE ALSO FENWICK, STOBART & CO. LTD., (1902) 1 CH. 506
In A.L. Underwood Ltd. v. Bank of Liverpool,34 a sole director of a company paid into his
own account cheques drawn in favour of the company; the bank collected the cheques and
credited him with the proceeds. The bank was sued by the company on behalf of a debenture-
holder claiming damages for conversion. The bank was held liable and it was not protected under
the rule in Turquafld’S case because the fact that the director had paid the cheques drawn in
favour of the company into his private account was so unusual to put the bank on inquiry and the
bank was negligent in failing to make proper inquiries.
It is notable that if the act of an officer of a company is such as would ordinarily be
beyond the powers of such officers, the act will not be binding on the company merely because
under the articles of the company, power to do the act could have been delegated to him. The fact
that the act is beyond the apparent authority of such officers is sufficient to put the plaintiff on
inquiry to ascertain whether the officer has in fact been given the authority to do the act. in such
a case, the act will be binding on the company only if the power to do the act has actually been
delegated to the officer, i.e., if the officer has actual authority to do the act on behalf of the
company.
In Kredit Bank Cassel v. Schenkers Ltd.,35 certain bills of exchange were drawn in the
name of the defendant company (who were forwarding agents) by its branch manager who had
the authority to draw bills on behalf of the company. The bills so drawn were not binding on the
defendant company because the drawing of bills was not within the apparent or ostensible
authority of the branch manager and consequently the plaintiff was under duty to inquire as to
the authority of the branch manager to draw the bills on behalf of the defendant company. The
defendant company would have been bound if it bad given him actual authority to draw bills on
its behalf but in this case, no such authority was given to the branch manager and consequently
the defendant company was not liable on the bills.
Similarly, in Anand Bihari Lal v. Dinshaw & Co.36 an accountant of the company without
authority transferred the property of the company to the plaintiff. The transfer was held to be
void for it is not within the apparent authority of the accountant to transfer the property of the
company. The transfer would have been the defendant company f it had given the accountant

34
(1924) 1 KB. 775.
35
(1927) KB. 826.
36
A.I.R. 1942 Oudh. 417.
actual authority to transfer its property but since no such authority was given to the accountant
the transfer was not binding on the company.

3. Forgery:
The doctrine of indoor management does not apply where the act, done in the name of the
company are void ab initio. Thus, if the document on which the person seeks to rely is a forgery
the doctrine of indoor management will not be app1icable.
In Roben v. Great Fingall Consolidated37, the question arose whether the company was bound by
a short’ certificate to which the company’s seal had been affixed by the company's secretary
without authority and the forged signatures of two directors were added. In this case, the share
certificate was issued by company’s secretary who had forged the signatures of two directors and
affixed the seal of the company without any authority, It was held that the company was not
bound by the share certificate because it was forged and, therefore, a Lord Lore burn has
observed that the doctrine of indoor management applies only to irregularities that otherwise
might affect a genuine transaction, but it cannot apply to a forgery.
However, a company may be bound even by a forged document on the ground of holding
out or estoppel. A company may be estopped from relying on the fact of forgery if the forged
document has been represented as genuine by officer or agent of the company having actual or
ostensible authority to do so.38 Thus as Thompson has observed, the company will be bound
even by a forged document if the company represents that the forged instrument is genuine
because in such a case it will be estopped from denying that forged instrument is genuine as
against an outsider who has relied to his detriment upon the representation.39 Besides, a company
will also be bound by a forged document provided the outsider pleading estoppel against the
company has relied on the forger’s apparent authority to execute the instruments. Thus, where a
director who has ostensible authority to borrow money under its memorandum and articles
commits fraud of the company by not placing the money borrowed by him on behalf of the
company, the borrowing will be binding on the company provided the lender is bona fide and

37
(1906) A.C. 439.
38
SEALY, L.S. CASES AND MATERIALS ON COMPANY LAW, P. 207.
39
ANDREWS R. THOMPSON, COMPANY LAW DOCTRINE AND THE AUTHORITY TO CONTRACT, (1955-56) 11 TORONTO
LAW ,JOURNAL, 238, 275.
thus the company cannot be allowed to refuse the payment of the loan on the ground of the fraud
of its own officer.40

4. No knowledge of the contents of articles :


Sometimes articles contain a “delegation clause” providing that the board of directors can
delegate its authority to an individual director. If an outsider dealing with the company has the
knowledge of delegation clause, he may assume that the power of delegation has been exercised
and the director entering into contract with him on behalf of the company has been delegated
authority to make such contract. The actual delegation being a matter of internal management1
he is Not bound to enquiry as to whether the authority has actually been delegated to the director
or not.41
However, the most controversial issue is whether an outsider entering into
a contract with an individual director purporting to act on behalf of his company without having
the knowledge of such delegation clause at the time of making such contract can also assume that
the power of delegation has been exercised and the director has been delegated the authority to
make such contract on behalf of the company.
According to one view42 he is not entitled to assume so. For example, in the case of Rama
corporation v. Proved Tin and General Investment Co43., the of the defendant company
contained a ‘delegation clause’ providing that the directors may delegate any of their powers,
other than the power to borrow and make calls, to committees consisting of such members of
their body as they think fit.” But in fact the Board of Directors had not delegated any of their
powers. A director of the defendant Company entered into a contract with the plaintiff company
to participate in a joint venture concerning the sale of a telephone directory but he did not
disclose to the Board anything about the contract.
The plaintiff company had no knowledge of the delegation clause at the time when the 0ntract
was entered into. The defendant company repudiated the contract. The plaintiff company tried to
enforce the contract on the strength of ‘delegation clause’ in the articles of the defendant

40
SRI KRISHAN V. MONDAL BROS. & CO., (1967) 1 COMP. L.J. 10.
41
LAKSHMI RATTAN LA! COTTON MILLS V. J.K. 1JUTE MILLS, A.I.R. 1957 ALL. 311.
42
HOUGHTION & CO. V. NORHARD, LOWE AND WILLS LTD., (1927) 1KB. 246
43
IBID
company. The Court held the plaintiff company was not bound by the agreement. Since the
plaintiff company had no knowledge of the ‘delegation clause’ when the contract was entered
into, it was not entitled to assume that the power of delegation had been exercised and the
director entering into the contract had been delegated an authority to do so. Its reason is that rule
in Turquarid’s case or the doctrine of indoor management is based on the principle of estoppel
and, therefore, where a person has knowledge of articles, he can assume that the officer openly
exercising the authority has been delegated such authority and the company can be estoppel from
alleging that the officer was not in fact so authorised.44 The view does not appear to be more
correct because an outsider dealing with the company is deemed to have constructive notice of
the articles and also because even if he had consulted the articles, he would not be able to know
whether the director had actually been delegated the authority.
The better view is that if an outsider dealing with the company entered into a contract
with an individual director of the company purporting to act on its behalf and the contract is
within the apparent or ostensible authority of the director, the contract will be binding on the
company even if the outsider had no knowledge of the articles of the company when he
contracted with the director, unless it is proved that the company under its memorandum or
articles, had no capacity either to make such contract or to delegate the authority to make such
contract to the director.45
Conclusion
The rule of constructive liability is a unrealistic doctrine. It is an imaginary doctrine and is a
fiction created by the judicial pronouncement of the Courts. Innumerable parties enter into a
number of contracts in everyday business of the company. This doctrine expects each and every
outsider not only to know the documents of the company but also presume to understand the
exact nature of documents, which is practically not possible. In reality, the company is not
known by the documents but by the people who represent it and deal with an outsider. The
outsiders do the business and enter into contracts not always on the basis of documents of the

44
ibid
45
British Thompson Houston Co. v. Federated European Bank Ltd., (1932) 2 KJ. 176; Kredit
Bank Cassel v. Schenkes Ltd., (1927) 1 K.B. 826 MahOllICd v. Ravcit Bombay House, (1958)
S.A 704; Lakshmi Rattan Lal Cotton Mills V. J.K. Jute Mills, A.LR. 1975 All. 311; Freedom
Lockyer v. BucklZttrSt Park Properties (Maitgai) Ltd., (i964) 2 Q.B. 480.
company but the goodwill and the reputation of the directors or officers who are representing the
company.
This is the reason why the British Courts and Indian Courts have shifted its approach in dealing
with the cases relating to the outsider of the company. The Indian Courts have not given much
importance to this doctrine. The European Communities Act has also abrogated the concept of
constructive notice by bringing Section 9 of the Act which recognizes the concept of good faith
in business transaction. This provision is in the tune of the reality of the business transaction,
where the outsiders of the company enter into the various contracts not on the basis of the
documents of the company but on the good faith of the company.
This is the reason why the courts have evolved the doctrine of indoor management as an
opposite to the doctrine of constructive notice in order to protect the interests of the outsiders.
The researcher on the basis of the various commentaries on the subject and the cases decided by
the British Courts and Indian Courts is of view that merely registration of a company should not
constitute the notice of the documents submitted to the registrar. Also, an outsider should always
have the freedom to make some assumption which a reasonable person may infer into the
particular circumstances.