Constructive Notice and Indoor Management

The doctrine of constructive notice

What it says. Every person dealing with a company is deemed to have notice of the contents of its memorandum and articles, and of any other document registered with the Registrar that is open to public inspection.

Where it comes from in the Act. Not from a section that states it, but from section 399(1)(a), which gives any person the right to inspect by electronic means any documents kept by the Registrar filed or registered in pursuance of the Act, on payment of the prescribed fee, and from section 399(1)(b), which lets any person require a certified copy or extract. Because inspection is available to all, notice is imputed to all.

Section 17 points the same way for members: on request, and on payment of the prescribed fee, the company must within seven days send a member a copy of (a) the memorandum, (b) the articles, and (c) every agreement and resolution referred to in section 117(1) so far as not already embodied in them. Default costs the company and every officer in default one thousand rupees for each day, or one lakh rupees, whichever is less.

The consequence. A person who deals with the company contrary to what the registered documents say cannot plead ignorance. If the articles forbid the company from borrowing more than a stated amount, a lender who lends more is fixed with notice of the limit.

Two limits on section 399 itself, both in its proviso and both worth a mark. The right of inspection in relation to documents delivered with a prospectus under section 26 may be exercised only during the fourteen days beginning with the date of publication of the prospectus, and at other times only with the permission of the Central Government; the same applies to documents delivered under section 388(1)(b). And by section 399(2), no process to compel production of a document kept by the Registrar may issue from any court or the Tribunal except with its leave, and any such process must say on its face that it was issued with leave.

The doctrine of indoor management: the rule in Turquand's case

What it says. A person dealing with a company in good faith, having satisfied himself that the transaction is consistent with the memorandum and articles, is not bound to inquire into the regularity of the company's internal proceedings. He may assume that whatever the articles require to be done internally has been done.

Royal British Bank v. Turquand is the decision that established the rule, and it is universally cited by that name. It is named here without a citation and without facts, deliberately: no report carrying it could be opened from where this book was written, and the house rule is that a citation goes only with a report that has been read. See authorities/cases.json and FINDINGS.md section 5.1.

Why it is fair. The internal proceedings are within the company's own control and knowledge and outside the outsider's. The company chose its directors, kept its minute book and knows whether the resolution was passed. As between an innocent outsider and a company whose own house was disordered, the loss belongs on the company.

The exceptions to indoor management

These are where the marks are, because the rule is easy and the exceptions are the examinable part. There are five and they should be given with a reason each.

1. Knowledge of the irregularity. A person who actually knows that the internal procedure was not followed cannot rely on the rule. He is not being misled; he is taking a chance.

2. Suspicion, or being put upon inquiry. Where the circumstances are such that a reasonable person would have made inquiries, and the outsider made none, he cannot claim the benefit. A transaction that is obviously outside the ordinary course, or of extravagant size for the company, puts a person on inquiry.

3. Forgery. The rule protects against irregularity, not against nullity. A forged document is not an irregular act of the company; it is not the company's act at all, and there is nothing for the rule to regularise.

4. Negligence, or failure to read what he was bound to read. The rule presupposes that the outsider has done what constructive notice requires. A person who never looked at the articles cannot say he assumed compliance with them.

5. Acts void or ultra vires. Where the act is beyond the company's capacity under its memorandum, no assumption about internal procedure can help, because the company could not have done the act however regularly it proceeded. See [The Doctrine of Ultra Vires].

A sixth is sometimes given: no representation at all. Where the outsider did not rely on the articles or on any holding out by the company, there is nothing on which the assumption of regularity can rest.

How the two doctrines fit together

Set them side by side and the logic is clean.

Constructive notice looks outward and binds the outsider. He is deemed to know the public documents, because he could have read them.

Indoor management looks inward and protects the outsider. He is not deemed to know the private proceedings, because he could not have read them.

The dividing line is availability. Anything on the register is his responsibility; anything in the minute book is the company's.

A worked example

Aurangabad Springs Limited has articles providing that the Board may borrow up to fifty lakh rupees, and that any borrowing above that requires an ordinary resolution of the members in general meeting.

Case one. A bank lends eighty lakh rupees. Its officer inspects the articles, sees the limit, and asks the managing director whether the members' resolution has been passed. He is told it has. In fact no meeting was ever held.

The bank is fixed with constructive notice of the fifty lakh limit and of the requirement of a resolution, because the articles are on the register and open to inspection under section 399. But whether the resolution was actually passed is an internal proceeding. The bank could not have discovered it, and it made the inquiry it could. The rule in Turquand protects it, and the company is bound to repay the eighty lakh rupees. Its remedy is against its own directors.

Case two. Same facts, but the bank's officer is the managing director's brother-in-law and knows perfectly well that no meeting took place. Exception 1 applies. He knew of the irregularity, so the rule does not protect him.

Case three. Same facts, but the loan is for eleven crore rupees, the company's entire turnover is two crore rupees, and the money is to be paid into an account in the managing director's own name. Any reasonable lender would have asked questions. Exception 2 applies: the bank was put upon inquiry and made none.

Case four. The board resolution and the members' resolution produced to the bank are both forged by the company secretary. Exception 3 applies. A forgery is not an irregular act of the company but no act of the company at all, and the rule cannot cure a nullity.

Case five. The articles limit borrowing, but the memorandum contains no object permitting the company to lend money, and the transaction is a loan by the company to a film producer. Exception 5 applies: the act is ultra vires the company, it is void, and no assumption about internal regularity can rescue it.

Case six. The bank never looked at the articles at all. Exception 4 applies. The rule assumes the outsider has discharged the duty constructive notice imposes on him.

Distinctions that carry marks

What this does NOT mean

It does not mean the outsider must actually read the articles. He is deemed to know them whether he reads them or not. Reading them is how he protects himself; not reading them does not protect him.

It does not mean indoor management cures everything. It cures irregularity, not incapacity and not forgery.

It does not mean the company can never recover. Where the outsider is bound, the company is bound to him, but it retains its remedies against the directors who acted improperly.

It does not mean constructive notice extends to everything a company holds. It extends to what is registered and open to inspection. Minute books, registers of the company's own internal decisions and correspondence are not on the register.

Limits and criticism

Constructive notice has been criticised for a long time as a fiction that suits companies and traps outsiders. Nobody reads the articles of every company they buy from, and pretending they do produces results no commercial person would predict.

The counter is that the doctrine is now mostly defanged. Between indoor management, the doctrine of ostensible authority and the modern practice of drafting objects and powers as widely as possible, the number of cases in which constructive notice actually defeats an honest outsider is small. What remains is a rule that encourages people to look at what is genuinely available to them, which is not an unreasonable thing to ask.

Quick revision

• Constructive notice: everyone dealing with a company is deemed to know its memorandum and articles and other registered documents, because section 399(1) gives any person the right to inspect them electronically and to take certified copies. Section 17 gives members copies within seven days.
• Section 399 provisos: prospectus documents under section 26 and documents under section 388(1)(b) may be inspected only within fourteen days of publication, otherwise with Central Government permission. Section 399(2): no process to compel production except with the leave of the court or Tribunal.
• Indoor management, the rule in Turquand: an outsider need not inquire into internal proceedings and may assume they were regular.
• Five exceptions: actual knowledge of the irregularity; suspicion or being put upon inquiry; forgery; negligence in not reading the public documents; and acts void or ultra vires.
• The line between them is availability: public documents bind the outsider, internal proceedings do not.

Test yourself

1. What is the doctrine of constructive notice and what is its statutory footing? Every person dealing with a company is deemed to have notice of its memorandum, articles and other registered documents. It rests on section 399(1), under which any person may inspect documents kept by the Registrar by electronic means and require certified copies, on payment of the prescribed fees.

2. State the rule in Turquand's case. A person dealing with a company in good faith, whose transaction is consistent with the memorandum and articles, is not bound to inquire into the regularity of the company's internal proceedings and may assume that everything required to be done internally has been done.

3. Give the exceptions to indoor management. Actual knowledge of the irregularity; circumstances putting the outsider upon inquiry; forgery; negligence in failing to read the public documents; and acts that are void or ultra vires the company.

4. Why is forgery an exception? Because the rule regularises an irregular act of the company. A forged document is not an act of the company at all but a nullity, and there is nothing for the rule to operate on.

5. A lender reads a company's articles, sees that a members' resolution is needed, asks and is told it was passed. It was not. Can the lender recover? Yes, subject to the exceptions. Whether the resolution was passed is an internal proceeding which the lender could not verify, so the rule in Turquand applies and the company is bound. The company's remedy is against its own directors.

6. How long may documents delivered with a prospectus be inspected under section 399? Only during the fourteen days beginning with the date of publication of the prospectus, and at other times only with the permission of the Central Government: proviso (i) to section 399(1).