Doctrine of Constructive Liability and Doctrine of Indoor Management under Companies Act, 2013
🔷 1. Doctrine of Constructive Notice
📌 Meaning
The Doctrine of Constructive Notice means that a person dealing with a company is presumed to have knowledge of the company’s public documents such as:
Memorandum of Association (MoA)
Articles of Association (AoA)
These documents are filed with the Registrar of Companies (ROC) and are available for public inspection. Therefore, third parties are deemed to have "constructive notice" of the contents of these documents, even if they have not actually read them.
📜 Legal Basis under Companies Act, 2013
Section 399 of the Companies Act, 2013 allows public inspection of documents filed with the ROC.
It enables third parties to access a company’s constitutional documents, which creates the presumption of knowledge.
🧾 Implication
If a person enters into a contract with a company that is ultra vires (beyond powers) the MoA or AoA, they cannot later claim ignorance.
The burden is on outsiders to ensure the company has the power to enter into such a contract.
🧑⚖️ Case Law
✅ Kotla Venkataswamy v. Ramamurthy, AIR 1934 Mad 579
Facts: The company’s AoA required signatures of three directors on any document. A document was signed by only two.
Held: The Court held the third party should have known the Articles’ requirement. The contract was invalid.
Principle: Ignorance of company rules is no defense; constructive notice applies.
🔷 2. Doctrine of Indoor Management (Turquand Rule)
📌 Meaning
The Doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. It protects outsiders dealing with a company in good faith.
According to this doctrine:
If a company's internal procedures (like board approvals, quorum, etc.) are not followed, but the act appears within the powers given in the MoA and AoA, the outsider is entitled to assume that internal procedures were properly complied with.
📜 Legal Basis
Though not expressly stated in the Companies Act, 2013, the doctrine is judicially recognized and harmonized with Sections:
Section 10: Binding effect of MoA and AoA.
Section 179: Powers of Board.
Section 166: Duties of directors.
🧾 Implication
Outsiders do not need to inquire whether all internal procedures were followed.
It protects third parties acting in good faith.
🧑⚖️ Case Law
✅ Royal British Bank v. Turquand (1856) 6 E&B 327
Facts: The company borrowed money without passing the required internal resolution.
Held: Outsiders can assume internal rules are complied with if the act is within apparent authority.
Principle: Foundation of the doctrine of indoor management.
✅ Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mills Co. Ltd., AIR 1957 All 311
Facts: The company secretary signed a promissory note. No board resolution was produced.
Held: The act was within apparent authority. The creditor was not bound to verify internal resolutions.
Principle: Protection to outsiders dealing with the company.
❗ Exceptions to Doctrine of Indoor Management
The doctrine will not apply in the following situations:
| Situation | Explanation |
|---|---|
| Knowledge of Irregularity | If the outsider knew of the internal non-compliance. |
| Negligence | If the outsider was careless and ignored red flags. |
| Forgery | If the act involved forged documents, the doctrine does not protect. |
| Act outside authority | If the act was ultra vires the company’s objects. |
🔁 Relationship Between the Two Doctrines
| Doctrine of Constructive Notice | Doctrine of Indoor Management |
|---|---|
| Protects the company | Protects the outsider |
| Assumes outsider knows public documents | Assumes insider follows internal rules |
| Outsider must read MoA/AoA | Outsider need not inquire into internal processes |
| Prevents abuse by outsiders | Prevents abuse by company insiders |
✅ Conclusion
Under the Companies Act, 2013, both the Doctrine of Constructive Notice and the Doctrine of Indoor Management play crucial roles:
The first protects companies by binding outsiders to the terms of public documents.
The second protects outsiders by relieving them of the duty to investigate internal management acts.
Courts in India have consistently upheld these doctrines, striking a balance between company protections and third-party fairness.
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