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Key takeaways

  • Since the company's rules and regulations are public information, it is the responsibility of an outsider to be aware of them, before entering into a contract with the company. This assumption is known as the Doctrine of constructive notice.
  • Doctrine of indoor management was established as an exception to the doctrine of constructive notice in order to counteract its effects, safeguard the third party from the company's arbitrary actions, and stop the latter from dodging their responsibility.
  • Both these doctrines have been developed in order to protect the interests of both parties to a contract.

Doctrine of Constructive Notice

This doctrine lessens adherence to the company's rules and regulations. When interacting with an outside party, the company is protected by this doctrine. The Doctrine of Constructive Notice can be summed up as follows, yet there is no clear description of what it exactly is. A company is a public entity, and its records, including its articles of association and memorandum of association, are available for public scrutiny. Therefore, it is expected that the outsider who is conducting business with the company has reviewed these documents. Since the company's rules and regulations are public information, it is the responsibility of an outsider to be aware of them. This assumption is known as Doctrine of constructive notice.

The MOA and the AOA of the company are filed to the Registrar of Companies at the time of the company's incorporation. The laws listed there regulate the company, and these documents serve as its charter. According to this doctrine, it is the responsibility of the outsider to examine and be knowledgeable about these two documents. The outside party cannot claim ignorance of the regulations outlined in the MOA or AOA as an excuse in the case of a disagreement. This guideline is crucial for deciding disputes that result from MOA and AOA infractions. Therefore, the theory of constructive notice might be construed as required mandate that an outsider be aware of the company's rules because such information is in the public domain. Since this information is already in the public domain, the company is not required to share it with the outsider.

The legal justification for this doctrine is provided by Section 399 of the Companies Act, 2013. According to this clause, the Companies Act permits a third party to view and review the company's documents that are kept by the registrar of the company. The ability to see the company's records is also provided in this part. The company's MOA and AOA are public records, and an outsider may only enter into a contract after reviewing these documents. This clause establishes the doctrine of constructive notice, according to which a person is assumed to be aware of the information in documents that are open to the public.

In the case of Crum v. Oakbank Oil Co. it was ruled that , anyone who enters in a contract with the company is deemed to be aware of and comprehend its MOA and AOA.

Doctrine of Indoor Management

The Doctrine of Indoor Management has a completely different character from the Doctrine of Constructive Notice. The former defends the outsider against the company's unlawful conduct, whereas the latter defends the company against the outsider's illegal actions. The constructive doctrine extends to the rule that real notice is not required to be given.

According to the Doctrine of Indoor Management, no one who enters into a contract with a firm may be forced to learn about how the company operates internally or how it is handling the contract. The doctrine of indoor management makes an exemption to the general rule of constructive notice doctrine. This doctrine of indoor management is based on the idea that the party entering a contract with the company does so in good faith and will not be harmed by its unlawful business practices.

This doctrine asserts, that it is not the role of an outsider to be aware of a company's internal affairs. The need to examine how the company operates inside or how its managers conduct themselves internally cannot bind the outsider. Inconsistencies in the internal workings of the organisation are therefore not the concern of the outsider. Discrepancies in the internal affairs of the company are therefore not the concern of the outsider. The business cannot shift the responsibility for its own unlawful internal acts onto an outsider. Except for MOA and AOA, it is not the concern of the outsider to examine internal management and corporate compliances. If any such irregularity arises as a result of the firm's activity, the company is accountable since the outsider acted in good faith. It will also be presumed that the company has completed internal compliance as it is expected that the outsider has awareness of the MOA and AOA. The company is accountable for adhering to all the conditions outlined in the MOA and AOA; an outsider cannot be assigned the responsibility of monitoring the company’s internal operations.

However, it is required of the outsider to determine if the contract complies with the MOA and AOA. An outsider can assume that the company is following all internal regulations if the contract's goal is in line with and approved by the MOA or AOA of the company. The outsider's responsibility ends there, and the company is now liable for any violation of law or remaining irregularity in the contract. The doctrine of indoor management essentially implies that the company must deal with its indoor problems and accept the outcomes. The directors who represent the company must adhere to this idea. Contracting parties can assume that the actions taken by these directors were authorised by and within the extent of their responsibilities. Therefore, since they are acting in their official role, every act they perform in compliance with the MOA or AOA is presumed to be lawful by other parties.

Doctrine of Constructive Notice Doctrine of Indoor Management
It safeguards the company against outsiders. It safeguards outsiders doing business with the company.
It is limited to the company's external position and affairs. It is limited to the company’s internal position and affairs.
The company's articles of association and memorandum are open to the public. The Registrar of Companies must receive their registration. These are accessible to the general public and outside parties. It is not necessary to document the internal affairs. they are not open for accessibility to public and third parties.
To be eligible for protection under the this theory, the third party must fully read and comprehend AOA & MOA (since these are public documents available to them with payment of a fee). In this case, the doctrine of "constructive notice" will not protect third parties who are unaware of an irregularity or lack of authority but who, with enough effort, may learn about those irregularities or lack of power. According to the "Turquand Rule," third parties who are unaware of any irregularities or lack of power shall be protected. Since it is assumed that there are no internal irregularities and that a third party is not permitted to enquire into the company's private business.
It acts as an estoppel against outsiders, for the benefit of insiders. It lessens the impact of the "Doctrine of Constructive Notice."

Conclusion

The Doctrine of Constructive Notice has brought a significant amount of difficulty in business and is harmful to third parties' interests, placing a heavy load on them and raising concerns in the minds of investors, according to a comparison of how the two doctrines are applied. As a result, it is considered to be restricting. This is another reason why Indian courts are hesitant to use this concept and have carefully examined it to make sure that it is not being used in a way that violates the rule of law and the fundamental principles of justice.Dehradun Mussoorie Electric Tramway Co. v. Jagmandar Das, a case from the Allahabad High Court, "rejected the doctrine of constructive liability and the Company was held liable to party to the transaction even the directors of the company borrowed the money which was neither in compliance with the articles nor it was done after obtaining the resolution in the general body."

As a result, the doctrine of indoor management was established as an exception to the doctrine of constructive notice in order to counteract its effects, safeguard the third party from the company's arbitrary actions, and stop the latter from dodging their responsibility. Due to the wide range of contracts that companies enter into and the inability of the law to address every issue, these two doctrines have developed to protect the interests of both parties.


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