What is the doctrine of indoor management and how is it different from the doctrine of constructive notice?
GradeHunt_TeamGradeHunt Team · · CA Intermediate
I'm doing Company Law for CA Inter and these two doctrines confuse me. One protects the company and the other protects outsiders? And what are the exceptions to indoor management? I always forget the case names.
You have the idea right. One doctrine protects the company, the other protects the outsider dealing with it.
Doctrine of constructive notice: the memorandum and articles of a company are public documents filed with the Registrar. So anyone dealing with the company is treated as knowing what they say, whether or not he has actually read them. If the articles say a director cannot borrow above Rs 50 lakh without a special resolution, a lender cannot later say he did not know of that limit. This protects the company.
Doctrine of indoor management: an outsider is expected to read the public documents, but not to check whether the company followed its internal procedures. If the articles allow borrowing once the members pass a resolution, the lender can assume the resolution was passed. This protects outsiders and is also called the Turquand rule, from Royal British Bank v. Turquand (1856).
Example: the articles of X Ltd allow directors to borrow if a general meeting approves. The directors borrow Rs 30 lakh from a bank, but no meeting was ever held. The bank can still recover from X Ltd, because whether a meeting was held is an internal matter.
Exceptions (where the outsider is not protected):
1. Knowledge of the irregularity: an outsider who actually knows the procedure was not followed (Howard v. Patent Ivory Manufacturing Co.).
2. Negligence or suspicion: where the circumstances should have made him suspicious and he did not inquire (Anand Bihari Lal v. Dinshaw & Co.).
3. Forgery: a forged document is void, so the rule cannot validate it (Ruben v. Great Fingall Consolidated).
4. Doubt about the agency itself: where the real question is whether the person was the company's agent at all, the outsider cannot use the rule to assume that he was.
5. Act beyond the company's own power: where a condition must be met before the company itself can use a power, the act is ultra vires the company, not just the directors, and the rule cannot save it.
To remember the difference in one line: constructive notice is about what is written in the public documents; indoor management is about whether the internal steps were actually taken.
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