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ConstructivenoticeandIndoorManagement

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National Law School of India University

The Doctrines of Constructive

Notice and Indoor Management

A Corporate law I Research Paper

Pranjal Singh

Id. No 1829

IIIrd year

B.A.LL.B.

(Hons.)

Bhoomija Verma

Id. No. 1801

IIIrd Year

B.A.LL.B.

(Hons.)

Date of Submission: December 8, 2012

2 [THE DOCTRINES OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT]

Pranjal Singh, Id. No. 1829 Bhoomija Verma, Id. No. 1801

Table of Contents

Table of Authorities .......................................................................................................... 3

Introduction ........................................................................................................................ 5

Chapter 1: Doctrine of Constructive Notice and Background ............................ 6

Chapter 1.1: Background to the Doctrine of Constructive Notice .............................. 6 Chapter 1.2: The Doctrine of Constructive Notice ........................................................... 8 Chapter 1.3: Problems with the Doctrine of Constructive Notice .............................. 9

Chapter 2: Doctrine of Indoor Management: The Turquand Rule .................. 11

Chapter 2.1: Inception of the Doctrine .............................................................................. 11 Chapter 2.2: Indoor management and the Laws of Agency: What should apply?12 Chapter 2.3: Doctrine of Constructive Notice: Positive construction vis-‐à-‐vis the

Doctrine of Constructive Notice? ........................................................................................ 15

Chapter 3: Abolition of the Doctrine Constructive Notice ................................. 17

Chapter 3.1: Treaty of Rome and Subsequent Abolition in Common Law ............ 17 Chapter 3.2: Current Legal Position on The Doctrine of Constructive Notice ..... 18 Chapter 3.3: Limitations of Section 40 and Turquand Rule ....................................... 19

Chapter 4: Indian Position on the Doctrines of Constructive Notice and Indoor

Management ..................................................................................................................... 21

Chapter 4.1: Adoption and Treatment of the Doctrines of Constructive Notice and

Indoor Management in India ................................................................................................ 21 Chapter 4.2: Current Position Of Law in the Matter ..................................................... 22 Chapter 4.3: Indian Position on the Doctrines: Analysis ............................................ 22 Chapter 4.4: Director as Fiduciary/Trustee or Agent? ................................................ 24

Conclusion ......................................................................................................................... 26

Bibliography ..................................................................................................................... 27

Annotated Bibliography ................................................................................................ 28

[THE DOCTRINES OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT] 3


Table of Authorities

Table of Cases:

English Cases:

1. Ashbury Railway Carriage and iron Co. Limited v. Riche, (1875) LR 7 HL 653.

2. B. Liggett (Liverpool) Ltd. v. Barclays bank ltd., [1928] 1 KB 48.

3. Biggerstaff v. Rowatt’s Wharf ltd., [1896] 2 ChD 93 (Court of Appeal)

4. British Thomson-Houston Co. Ltd. v. Federated European Bank Ltd., [1932] 2 KB

176 (Court of Appeal).

5. Egyptian International Foreign trade Co. v. Soplex Wholesale supplies Ltd., The

Raffaella [1985] BCLC 404.

6. Ernest v Nicholls, [1857] 6 H Cas 401.

7. First Energy (UK) Ltd. v. Hungarian International Bank Ltd., [1993] BCLC 1409

(Court of Appeal).

8. Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.

9. Hely Hutchinson v. Brayhead Ltd., [1968] 1 QB 549.

10. Houghton v. Nothard, Lowe and Wills, [1927] 1 KB 246 at 267.

11. Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD 156.

12. Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal).

13. Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869.

14. Morris v. Kanssen, [1946] A.C. 459.

15. Oakbank Oil Company v. Crum, [1882] 8 AC 65.

16. Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.

17. Royal British Bank v. Turquand, [1855] 5 E&B 248.

18. Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords).

19. Underwood v. Bank of Liverpool, [1924] 1 K.B. 775.

Indian Cases

1. Albert J. Judaih v. Rampada Gupta, AIR 1959 Cal 715. 2. Charnock Collieries Co. Ltd. v. Bholanath Dhar, (1912) ILR 39 Cal 810

3. Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All

141

4. Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP)

5. Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579



6. Lakshmi Ratan Lal Cotton Mills v. J.K. Jute mills Co., AIR 1957 All 311.

7. P.Rangaswami Reddiar v. R. Krishnaswami Reddiar, AIR 1973 Mad 251 8. Ram Buran Singh v. Mufassil Bank, AIR 1925 All 206 a

9. Seethalakshami v. Narayan Swamy, (1922) 15 LW 205.

10. T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co., AIR 1936 Bom 62.

Table of Statutes

English Statutes

1. Companies Act, 1856.


3. Companies Act ,1948.



Indian Statutes:


2. Indian Contract Act, 1872.



Introduction

This Research Paper is an analysis of the Doctrines of Constructive Notice and Indoor

Notification. The Researchers have taken a straight forwards approach. This research paper

delves into the nature of the Doctrine of Constructive notice to understand its implications on the

commercial world. 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 way with this doctrine completely.

With the advent of the Companies Act of 1985 and subsequently, the act of 2006, this doctrine

is all but eradicated from the English corporate law. Thus, all discussions on this topic in this

research paper except for the parts that deal with the current legal position are all for mere

academic discussion. However, in India the rule was never too strictly applied but continues to

persist and the Indian jurisprudence, for this reason has been discussed separately in this paper.

This research paper also analyses the doctrine of indoor management that is often called an

exception to the ruel of constructive notice but the researchers have critically evaluated the true

nature of this doctrine and its expansive ambit. The researcher has then gone ahead with

connecting this doctrine with the general principles of agency in order to restrict its ambit, lest it

become a monster like its parent, the doctrine of Constructive Notice. Here, the researchers have

started with a detailed analysis of the law of agency as applicable to the Company law. At the

same time, the researchers have taken care to maintain a coherent flow of arguments: the

doctrine of constrctive notice is restricted by the doctrine of indoor management which, in turn,

is restricted by the application of the rule of Ostensible authority.

However, this research paper has also restricted its own scope by not accounting for the liability

of the agent in cases of fraud or misrepresentation of self-authority. It also steers itself clear of

the doctrine of Ultra Vires, making only necessary and incidental references to it for the

purposes of clarifying the nature of the Doctrines of Constructive Notice and Indoor

Management.



Chapter 1: Doctrine of Constructive Notice and Background

Chapter 1.1: Background to the Doctrine of Constructive Notice

The Doctrine of Constructive Notice to be studied in depth requires a preliminary study of

various doctrines that have together blended in to create the situation that in turn led to the

inception of the Doctrine of Constructive notice. These doctrines are The doctrine of Apparent

authority of an agent on one hand and the doctrine of Ultra vires on the other. This area of

company law represents its blend with the law of agency. The company, as is clear to us, only

acts through its agents.1 Hence, the law of agency is applicable to the acts of the company’s

agents who enter into contractual relationships on behalf of the company.

An agent may possess two kinds of authorities, actual or apparent. While actual authority

indicates factual conferment of authority on an individual, apparent authority should first be

taken to mean that there is no real authority but a kind of presumed authority due to suggestive

circumstances. This principle was suitably defined in Freeman and Lockyer’s case,2 but it is still

often confused with implied authority. But it must be remembered that apparent authority is

nothing but the impression in the mind of the third party.3 The crucial distinction between the

two lies in the fact whether there exists a relationship between the principal or the agent.4

The Doctrine of Apparent authority was also elaborated in Lockyer and Freeman’s5 Case by

Diplock L.J.6 The requirements that he puts forth for the existence of actual authority clearly

highlight that the basis of such an authority is not the existence of any such authority but a

representation by the principle. This kind of authority is treated distinct from the person and 1 Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480.: Per Diplock LJ: “An Actual Authority is a legal relationship between the principal and the agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principals of contracts…the usages of the trades, or the curse of business between the parties. To thi agreement the Contractor [Third Party] is a stranger…; Nevertheless, if the agent does enter into a contract, it does create contractual rights and liabilities between the principal and the contractor.” 2 Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480. 3 J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50, L. Q. Rev., 224, 226 (1934). 4 Boyle and Bird’s Company Law, 118 (1st Indian Reprint, 1997) 5 Id. 6 “An apparent or ostensible authority… is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent authority”, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract, it is irrelevant whether the agent had actual authority to enter into the contract.”



depends on the representation made by the principal to the world at large.7 This representation

maybe through expression or direct implication of the principal’s conduct, or through the

principle’s general treatment of the agent, say by giving him a particular position, the outcome

of which would ordinarily include bestowal of such authority on the agent. Such emphasis on

representation then brings apparent authority to be further grounded in the rule against estoppel.8

The former conduct of the principal is more easily linked to the rule of estoppel but the latter,

general, conduct of the principal is a link made more artificially. Often the two categories

overlap as every representation, as a matter of practice has some elements of both generality and

specificity.9 However, it must be kept in mind that the representation should have credibility to

be reliable. Thus, for this purpose, the principle, who makes the representation should have

actual authority to do that act, otherwise, it may not be tenable to assume that one may create a

chain of agents and sub-agents with no actual authority at the root of such ostensible authority.10

This rule was applied to company law as well in Hely-Hutchinson case wherein it was held that

de facto discharge of duties of a position result in ostensible authority.11

Now we must look at the issue of the agent exceeding his/her authority. The agent of a company

may exceed his/her authority in two ways. Firstly, the act of the agent may be ratifiable by the

Company and secondly, the act may be outside the legal capacity of the company to ratify.12 We

shall deal with the latter case first while we elucidate the doctrine of Ultra vires vis-à-vis the

authority of an agent.

Now turning to company law, this general rule of agency has to be more specifically applied.

The authority of an agent here, actual or apparent ,are both hit by the Doctrine of Ultra vires.

Here, the company is not bound by a contract or any other act of its agent, in the exercise of

7 Supra note 3 at 228. 8 Supra note 2 at 503. 9 Bowstead and Renold’s on Agency, 309-310 (F.M.B. Reynolds ed., 16th Edn., 2001) 10 Supra note 2 at p.505 11 Hely Hutchinson v. Brayhead Ltd., [1968] 1 QB 549. Here, Lord Pearson held: “Now there is not usually any direct communication between the Board of Directors and the Outside contractor. The actual communication is made immediately and directly, whether it be express or implied, by the agent to the outside contactor. It is, therefore, necessary in order to make a case of ostensible authority to show in someway that such communication which is made directly by the agent is made ultimately by the responsible parties, the Board of Directors…” 12 Ever since the Companies Act 1856, all companies acts have prescribed an object clause to be incorporated in the memorandum of association of the company. For instance, Sec. 2(1)(c) of the English companies act 1985 and Sections 13(1) (c) and (d) of the Indian Companies Act 1956 make it mandatory for the Company to mention its objects in its Memorandum of Association. Such a requirement is necessary for the protection of the shareholders, who would, as Sealy puts it, ideally not like to see their savings squandered for ludicrous purposes other than the one for which they had invested in the company in the first place.



his/her agency, that the company, by virtue of its Articles or the memorandum, had no legal

capacity to enter. Such an act may not be binding on the company whether the authority of the

agent is actual or apparent.13

Chapter 1.2: The Doctrine of Constructive Notice

However, sometimes while the act may not be ultra vires the company’s legal authority, it may

still not be in the agent’s power to perform that act in the course of his/her agency. In case he

he/she still goes ahead to perform that act, the question of authority of an agent becomes

applicable in the company law. The negative application of the wider Doctrine of Apparent

Authority came to be known as the Doctrine of Constructive notice.14

Simply put, the Doctrine of Constructive Notice was first envisaged as early as 1857 with

respect of Deed of Settlement companies where it was held that a person dealing with a

company should be deemed to have notice of that company’s registered constitutional

documents.15 By, extension, it also came to be held that such person should also have understood

the provisions of these documents.16 These Documents may not only include the articles and the

memorandum of association, but also special resolutions and particulars of charges which are

required to be filed with the registrar. However, the ambit of constructive notice does not seem

to have covered the matters filed by a company to disclose the financial information and other

information, in order to assist the shareholder to make an informed judgment.17 However, the

scope remained uncertain and now is only a matter of academic interest in common law, due to

Companies Act 1989.18

13 Ashbury Railway Carriage and iron Co. Limited v. Riche, (1875) LR 7 HL 653; 14 I.D. Campbell, Cntract with companies: II – The Indoor Management Rule, Vol. 76, LAW QUARTERLY REVIEW, 115, 117 (January 1960); The Doctrine of Constructive Notice has been held to only act against the contractor and not in his favour. Moreover, the officers of the company cannot be said to assume more power than the constitutional documents of the company permit. Campbell is also quick to admit that the rule is only applicable if there is usual or ostensible authority in the given case. Since for the purpose of this project, usual authority is considered a form of ostensible authority, they are one and the same. 15 Ernest v Nicholls, [1857] 6 H Cas 401; While the case dealt with deed of settlement companies, the Doctrine established would naturally come to apply more generally to the later established companies through their Articles of Association and Memorandum of Association. 16 Oakbank Oil Company v. Crum, [1882] 8 AC 65. 17 Krishnayen Sen, Rule of Constructive notice Vis-à-vis the Doctrine of Indoor Management, Vol.11, COMPANY LAW CASES, 732, 733 (2003). The doctrine of constructive notice seems to cover as per the lord of Chancery in Ernest v. Nicholls only those documents that are available to the public in general in the Company House. 18 L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW, 216 (7th edn., 2001); Companies Act of 1989 that came into force in 1991, abolished the doctrine of ultra vires as well the Doctrine of Constructive notice.



This doctrine, by itself, seeks to nullify the assumption of ostensible authority of the agent as it

places a burden on the third party contractor to make additional inquiries into the registered

documents of the company and infer the extent of the agent’s authority on that basis as well, in

order to protect the company from outsiders. Thus, the rule may not apply to favour the third

party, but only against it.

Chapter 1.3: Problems with the Doctrine of Constructive Notice

There has been considerable judicial debate in cases, where the company itself has made

representations of apparent authority or the belief of the third party in the authority of the agent

stems from some other source than a reading of the Articles of the company, can the third party

allege that upon reading the articles of association of the company, such authority of the agent

would have been apparent and thus the third party must be assumed to have constructive notice

of the articles? The judicial opinion on the question is largely divided as to whether the doctrine

may operate for the third party.19 But this question will be analysed by the researchers in detail

in the next chapter where principals of agency are applied to the doctrine of indoor management.

This is to mean that the third party may not be allowed to use this rule to claim constructive

knowledge of the articles of the company to infer the authority of the agent to enter into a

contract, when they do not have actual knowledge of the articles.

The last proposition is itself, highly problematic, but the doctrine itself also creates an

unfavorable climate for business as it creates a disproportionate burden on part of the third party,

which was, in turn, impeding smooth trading. This perception of the doctrine is strongly

criticized, unanimously by the jurists as well as writers. It is not at all a logical chain of reason

that, because the law gave everyone the opportunity to find out about a company’s registered

documents, there was a corresponding duty on part of the third party to peruse through these

documents. One justification of having this rule in place was that limited liability companies did

not exist at that point of time and the risk was always on the unwitting shareholder. Thus, the

effort of the third party was counterbalanced by the risk on part of the shareholder. However,

once limited liability became the general norm in company law, the real risk shifted from the

shareholder to the creditor and the rule ceased have such a justification. Moreover, in the

19 Houghton v. Nothard, Lowe and Wills, [1927] 1 KB 246 at 267; This means that the contractor may not invoke the doctrine of Constructive notice to emphasize the contractual liability of the company without ever relying on the articles while entering into the contact with the said company.

10

[THE DOCTRINES OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT]


modern times, the business decisions must be made promptly and the registered documents may

only be obtained from the registrar’s office at great expense of time and effort.20

Even before the Limited Liability company was born, the Doctrine of Constructive notice had

the potential of creating an unnecessary risk in the minds of the Third party. Hence, as early as

1856, legal measures were taken to mitigate the worst of the implications of the constructive

notice rule.

20 Supra note 14 At 215-216.



Chapter 2: Doctrine of Indoor Management: The Turquand Rule

Chapter 2.1: Inception of the Doctrine

In the famous case of Royal British Bank v. Turquand,21 the court set forth a proposition of law

that later came to be called the Doctrine of Indoor Management. The doctrine states that if a

person in good faith deals with the board of directors or any other representative body of a

company which is in fact exercising the power of management and direction of its business and

affairs, that person is not affected by defects of procedure within the company or by its failure to

fulfill conditions which are required by the companies memorandum or articles to be fulfilled

before the act or transaction in question is affected.22

While many authors have argued that the rule is an exception to the rule of Constructive notice,

some also feel that the doctrine serves a much wider role at a greater level. If we look at the two

doctrines with respect to the point of time when the doctrine of indoor management comes into

operation, we will notice that this doctrine does not really act so much as an exception to the rule

of constructive notice but as a limiting factor to its ambit. Essentially, under the doctrine of

constructive notice, while the third person was bound to take notice of the provisions of a

company’s Memorandum and Articles, and thus identify any restrictions in the same, he/she is

not bound to inquire any further. He could take it for granted that the agent has been duly

appointed.23

This rule has been in place for two reasons. Firstly, to limit the burden of inquiry placed on the

shoulders of the third party entering into a transaction with the company and, secondly, the third

party may not have the means to ascertain whether the inner formalities of the company are

carried out properly or not.24

Thus, the application of the Turquand rule, or the doctrine of indoor management, is restricted to

people unaware of any irregularity in the authority of the agent with whom they are contracting.

If the circumstances so suggest, the rule would also protect any member or directors of the

21 [1855] 5 E&B 248. 22 Robert R. Pennington, COMPANY LAW, 130 (8th edn., 2001) 23 Mahoney v East Holyford Mining Co. [1875] LR 7 HL 869 (House of Lords): here Hatherly L.J. held that while the third party is required to know the mode of appointment and the duties of the Directors, beyond that the where there are person conducting the affairs of the company in a manner that seems perfectly consonant with the articles of association, then those dealing with them, externally are not to be affected by any irregularities which may take place in the internal management of the company. 24 Supra note 16 at 218.

12



company due to their ignorance with regards to that particular transaction that they seek to

enforce.25 Conversely, any outsider who has true knowledge of the affairs of the company or is

put on inquiry would not be protected by this rule.26

Some questions that arise in relation to the Doctrine of Indoor Management are mostly with

respect to its ambit as we shall notice in the next sub-chapter.

Chapter 2.2: Indoor management and the Laws of Agency: What should apply?

Firstly, it must be made clear that the doctrine of indoor management doesn’t apply to forged

documents as has been made clear in the Ruben case27 wherein it was clearly held that a forged

document is a pure nullity. However, given the wide ambit of such a ban, there are exceptions to

it, such as when an agent of the company, with actual or ostensible authority, represents the

document to be genuine. Even in cases where the agent may represent his own authority to be

genuine, such “forgeries” will not amount to nullity as such but general principles of company

law would apply.28 Even in the Kreditbank case29 forged documents were held to be null and

void.

Now looking at the rule of indoor management at a wider angle, one would see it as a protection

for the third party against improper appointment and thus defective authority of the agent but it

would still assume that there has to be at least an ostensible authority with the agent for the

doctrine to apply.3031 However, there might be cases when the agent’s authority itself is

question, that is to say that it is alleged there is no authority at all but a sweeping application of

the Turquand rule would bind the company to any transaction entered into by any of its agents

25 See Helly-Hutchinson, [1968] 1 QB 549; Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD 156. 26 B. Liggett (Liverpool) Ltd. v. Barclays bank ltd., [1928] 1 KB 48; Howard v. Patent Ivory Manufacturing Co., [1888] 38 ChD 156: here,It has been held that where the third party can be assumed to have notice of the internal irregularity or could have noticed the irregularity through ordinary care and caution, the rule of indoor management would not protect the third party. 27 Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords) 28 Supra Note 16 at p. 227. 29 Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal). 30 Morris v. Kanssen, [1946] A.C. 459 31 Vincent Powell-Smith, THE LAW AND PRACTICE RELATING TO COMPANY DIRECTORS, 119 (1969). This rule basically means to say that where articles give full power to the board to delegate its functions to a director or any other officer of the company, then it follows that any outsider is entitled to assume, unless he has knowledge to the contrary, that such power has been delegated to such an agent of the company who purports to exercise it



who could have been empowered by the company to do so and thus create an unnecessary risk

for the company.32

Such was indeed the case in the early years of its inception as the indoor management rule was

applied liberally and it was held that if there is de facto exercise of power by a person then he

may be thought to be represented as occupying a position that would allow such exercise of

power. It would benefit now to retrospectively analyze the application of indoor management

rule with respect to the principles of agency In Biggerstaff’s case33 the director in question

discharged the functions of the managing director and the articles provided for the appointment

of a managing director but there was a lack of evidence as to whether the director in question

was appointed to the position. The court, referring to Lindley34 held that so long as there was a

power to appoint and the third party has no notice of any irregularity in the appointment, the

company is bound by the acts of the agent within the usual course of his authority.

Thus, in such cases it is not enough for the court to rely on the rule of indoor management only.

In fact, in the Kreditbank case35 the English court finally restricted the ambit of indoor

management by stating that not just anyone who could have been delegated the authority to enter

into a transaction on behalf of the company may be allowed to do so.36 This judgment by

questioning the principal of agency in the doctrine of indoor management seems to usher in the

general principals of agency into company law.

Thus, we come to a second kind of situation where the agent exceeds his/her authority. Unlike

indoor management rule, there is no defective bestowal of authority, but a lack of authority

altogether.

Since, now the question was whether the agent who purports to bind the company with his deeds

has the authority to do so or not, questions of actual and ostensible authority came into the

purview of this research paper. The court also increasingly came to rely on the “holding out”

32 Supra note 12, See Campbell at 115. 33 Biggerstaff v. Rowatt’s Wharf ltd., [1896] 2 ChD 93 (Court of Appeal) 34 Lindley on Companies, 159 (5th Edn.) 35 Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal). 36 The Court Felt that the doctrine if allowed to applicability unbridled, then the logical conclusion of such a doctrine would be extremely alarming… “Anyone who has the pen of a ready writer need only sit down and write a bill of exchange in the name of a company having an article in this form, and the company would presumably be bound when the bill got into the hands of a holder for value without notice.” It was further held that there needs to be evidence for authority to exist with the agent who has bound the company in the given transaction.

14



principal, where the principal makes a representation of the agent having the requisite authority,

which was already discussed in the preceding chapters under the doctrine of apparent authority.

As already discussed, the principal may make a representation giving authority to the Third

Party in two ways: firstly, by making an express or implied representation to the third party of

granting an authority to the agent to act in a particular transaction and, secondly, by giving the

agent a position with which certain powers are usually associated.37 The usual authority that

follows the position of the contracting agent is an important factor and was used to bind the

company in the First Energy Case38 in conjunction with a representation by the agent himself to

that effect.

In cases where it is alleged that there is no authority with the agent, the company may be

estopped from denying authority to its agent if it has resorted to any of the two alternatives but

the rule has been applied strictly to determine as to when a person can rely on the ostensible

authority of the agent of a company. In the case of Rama Corporation.39, there was some clarity

given to the plethora of seemingly conflicting decisions on the exact limitation on the indoor

notification rule. The court crystallized the principal to mean that the exact ingredients to

construe apparent or ostensible authority of the agent by the third party should be De facto

exercise of power and a representation of actual authority though such representation may be

express or implied. Also, this principle reconciles with the Turquand rule favorably as the

question that the rule essentially deals with is that of De Jure execise of power. The Doctrine of

Indoor Notification was also further limited in Houghton and Co.40 case through the judgment of

Bankes L.J., who held that the unusual nature of the transaction should put the third party on

inquiry about the real authority of the transacting party an thus render the rule inapplicable in

this sense.

37 Egyptian International Foreign trade Co. v. Soplex Wholesale supplies Ltd., The Raffaella [1985] BCLC 404 at 411; When a person is appointed to a post within the company, in third party’s view, he is deemed to be vested with all the powers vested ordinarily in an individual occupying that post. Some of these powers are statutorily accorded and some are accorded through the memorandum or the articles. However, it must be noted that in common law the managing director’s authority has a wide scope due to the modern trend of the articles allowing the board to delegate a plethora of powers to the managing director. An ordinary director’s power is considerably lesser in this respect as he might, at the most be granted the power to validate the instruments of daily working of the company, and that too after such instrument’s ratification by the managing director. 38 First Energy (UK) Ltd. v. Hungarian International Bank Ltd., [1993] BCLC 1409 (Court of Appeal) 39 Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147. 40 Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246.



However, the Final clarification was offered only in the Freeman and Lockyer case41 wherein it

was held that in British Thomson Houston Co. case42 as well as the Mahony case43, where the

third party’s claim was allowed, the contract was actually hit by the provisions of the Articles

and the Memorandum of association of the companies, but, more importantly, the persons

making the claim of authority were people who, in the ordinary circumstances, would seem to be

possessed of such authority by an outsider who is not familiar with the articles of the company.

However, if the persons were not so, then the contractor [third party] would not be able to claim

that they relied on the representation made unless they were proved to be familiar with the

articles of the company, in keeping with the rule of law set by Bankes L.J. in Houghton & Co.

case.44 This point is further elaborated in the next sub-chapter.

Moving on to cases where the claim of the third party failed,45 the court held that these were

cases where the transactions were of an unusual nature and the assumption of authority by an

outsider will not be easy to make.46 In none of the case could the contractors have claimed that

the agent was acting in the course of the usual authority that a person in his/her position is

expected to possess. Thus, the contractor could not have relied on the usual authority argument

to allege representation by the company.47 He/she would have to rely on the relevant provisions

of the articles of association, if any. It is in this respect that the next sub-chapter becomes

relevant.

Chapter 2.3: Doctrine of Constructive Notice: Positive construction vis-‐à-‐vis the

Doctrine of Constructive Notice?

We have already studied that where there is a power to delegate functions to an officer of the

company and such an officer purports to bind the company to a transaction, whether or not such

delegation has taken place, the courts have held that a representation of the agent’s authority by

the principal is necessary for the transaction to be valid. However, in chapter 1.3, we also

discussed the issue of whether or not a party, which has not relied on the articles or the 41 Freeman and Lockyer v. Buckhurst Park Properties Ltd., [1964] 2 QB 480. 42 British Thomson-Houston Co. Ltd. v. Federated European Bank Ltd., [1932] 2 KB 176 (Court of Appeal) 43 Mahony v. East Holyford Mining Co., [1875] LR 7 HL 869. 44 Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246. 45 Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246; Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147; Kreditbank Cassel GmbH v. Schenkers ltd., [1927] 1 KB 826 (Court of Appeal) 46 G.H.L. Fridman, THE LAW OF AGENCY, 278 (4th edn., 1976) 47 The argument could not have proceeded any further as the usual authority of the position that agent currently occupies does not extend to entering into the purported transaction.

16



memorandum of the principal company before transaction, can later enforce the notion of

ostensible authority by claiming a constructive reading of the articles. In cases where there are

such provisions for delegation in the articles and the third party did not have any notice of such

provisions before entering into the contract, the judiciary has been inclined both ways as we saw

in Biggerstaff case48 where the prior knowledge of the articles was not considered to be

necessary so long as there existed a power to delegate.

The first case, where this issue seems to have been that of Underwood v. Bank of Liverpool49

where the court held that constructive notice doctrine may only act as a negative doctrine against

the third party and not in its favour.

However, in the subsequent case of Houghton and Co. v. Northard Lowe and Wills ltd.50 the

court overturned the decision of Wright J., who had followed the Biggerstaff ratio and held that

so long as their was a provision for delegation of powers, there need not be knowledge of such a

provision on part of the outsider. The Court of appeal held that the acting on a mistaken

assumption of delegation of power is still to some extent tenable in court. On the other hand, not

knowing that such delegational power even exists and still relying on it and even exercise of

such power by the company when in fact there was no such exercise, defeats all tenets of logic.51

The same logic was subsequently followed in Rama Corporation case52 but a conclusive

clarification was once again offered in Freeman and Lockyer’s judgment wherein it was held

that in cases where the transaction is not to be ordinarily within the power of the agent so

purporting, the contractor must rely on the articles of association to prove that a representation

was made and relied upon. However, if the representation was not known to the third party vide

the reading of the articles, then it defeats all logic for them to contest a reliance on the same.

Thus, it was also finally held that the Doctrine of Constructive Notice is a purely negative one

and may only be used against the third party and not to benefit it. 48 Biggerstaff v. Rowatt’s Wharf ltd., [1896] 2 ChD 93 (Court of Appeal) 49 Underwood v. Bank of Liverpool, [1924] 1 K.B. 775. 50 Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246. 51 Per Sargant L.J.: “in a case like this, where that power of delegation has not been exercised and where admittedly Mr. Dart and the plaintiff firm has no knowledge of the existence of that power and did not rely on it, I cannot for myself see how they can subsequently make use of this unknown power so as to validate the transaction…They might rely on their knowledge of the power of delegation, had they known of it, as part of circumstances entitling them to infer that there had been a delegation and to act o that inference, though it were a mistaken one. But it is quite another thing to say that the plaintiffs are entitled now to rely on the supposed exercise of a power that was never in fact exercised and of the existence of which they were in ignorance at the date when they contracted.” 52 Rama Corporation LD. v Proved Tin and General Investments LD, [1952] 2 QB 147.



Chapter 3: Abolition of the Doctrine Constructive Notice

Chapter 3.1: Treaty of Rome and Subsequent Abolition in Common Law

In UK, the Jenkins Committee first made the argument for reform and abolition of the Doctrine of

Constructive notice in 1962 as corollary to the necessary abolition of the doctrine of Ultra vires. It

sought to replace the doctrine with an elaborate set of rules but it is noteworthy that

Commmonwealth countries were coming up with ways to abolish the doctrine of Ultra vires

altogether.53 Even though the doctrine was restricted to questions of capacity of a company, the

obvious relation between the Doctrine of Ultra Vires and the Doctrine of Constructive Notice made

the doctrine a latent threat in the mind of the third party.54

Once the United Kingdom became a part of the Treaty of Rome and joined the European

Community, it had to make certain modifications to its domestic laws in accordance with the EC

First Directive on Company Law.55 Section 9(1) of the European Communities Act, 1972 provided

protection to the third party dealing in good faith when the company’s capacity was the issue.56

This section was later re-enacted as Section 35 of the English Companies Act, 1985. However, it

was only in the case of TCB Ltd. v. Gray57 that the doctrine of Constructive Notice met with its

Demise.58

Sir Nicholas brown-Wilkinson V.C. held that EC Directive and Section 9(1) of the European

Communities Act were aimed at providing protection to a third party dealing in good faith with a

company from unnecessary harm from the doctrines of ultra vires and constructive notice.59

53 See Sealy at p.146. 54 The doctrine could be still applied to exclude the notion of apparent authority in the mind of third party by simply claiming that the act of the agent was ultra vires the company’s constitution and thus there can be no ratification at all. This position doesn’t change even after the incorporation of Section 35 of the Companies Act 1985. 55 68/151/EEC, Article 7. 56 Section 9(1) reads:“In favour of a person dealing with a company in good faith, any transaction decided on by the directors shall be deemed to be one which it is within the capacity of the company to enter into, and the power of the directors to bind the company shall be deemed to be free of any limitation under the memorandum or articles of association; and a party to a transaction so decided on shall not be bound to enquire as to the capacity of the company to enter into it or as to any such limitation on the powers of the directors, and shall be presumed to have acted in good faith unless the contrary is proved.” 57 TCB Ltd. v. Gray, [1986] 1 All ER 587: 58 J.S. McLennan, Demise of Constructive Notice Doctrine in England, Vol. 103, SOUTH AFRICAN LAW JOURNAL, 558, 559 (1986) 59 per Sir Nicholas Brown-Wilkinson: “Section 9(1) was passed to bring the law of England into line with art 9 of EEC Council Directive 68/151. In approaching the construction of the section, it is in my judgment relevant to note that the manifest purpose of both the directive and the section is to enable people to deal

18



However, Section 35 in the 1985 act inadequate to abolish the doctrine completely due to flawed

drafting. It only applied to transactions decided on by directors, and it only applied to the third

party but offered no counter protection to the company. Hence, Professor prentice while addressing

these issues also recommended the abolition of the Doctrine of constructive notice as well.60 These

recommendations found placein the 1989 act that recasted Section 35 and Sections 35A but what

the researchers here are concerned with is the addition of Sections 35B61 and 711A62. Section 35B

has no qualifiers and strikes at the doctrine of constructive notice by claiming that there is no duty

to “notice” on part of the third party as to whether the company has the legal capacity to enter into

that particular transaction or whether the directors posses the authority to do so. This section

effectively spells death for the doctrine of constructive notice but section 711A while further

solidifying this idea, also has the potential to unravel the entire reformatory approach. Through

interpretation, Subsection (2) of 711A might be restricted to only apply to cases of blatant disregard

where any ordinary person might be roused to inquiry63 However, Section 711A was never brought

into force, presumably for the same reason.

Chapter 3.2: Current Legal Position on the Doctrine of Constructive Notice

The current act in Operation in England is the Companies Act, 2006. The provisions of all these

previous acts have been recast into Section 40 of this act.64 This section deals with the issue of ultra

vires and constructive notice in detail.

with a company in good faith without being adversely affected by any limits on the company's capacity or its rules for internal management. Given good faith, a third party is able to deal with a company through its "organs" (as the directive describes them) or directors. Section 9(1) achieves this in two ways. First, it "deems" all transactions to be authorised. Second, it "deems" that the directors can bind the company without limitations.The second part of the section reinforces this by expressly abolishing the old doctrine of constructive notice of the contents of a company's memorandum and articles. It being the obvious purpose of the section to obviate the commercial inconvenience and frequent injustice caused by the old law, I approach the construction of the scction with a great reluctance to construe it in such a way as to reintroduce, through the back door, any requirement that a third party acting in good faith must still investigate the regulating documents of a company” 60 See Sealy at p. 147. 61 Section 35B: “No duty to enquire as to capacity of company or authority of directors: A Party to a transaction with a company is not bound to enquire as to whether it is permitted by the company’s memorandum or as to any limitation on the power of the board of directors to bind the company or authorize others to do so.” 62 Section 711A: Exclusion of deemed notice:

(1) A person shall not be taken to have notice of any matter merely because of its being disclosed in any document kept by the registrarof companies (and thus available for inspection) or made available by the company for inspection.

(2) This does to affect the question whether a person is affected by notice of any matter by reason of a failure to make such inquiries as ought reasonably to be made.

63 See Sealy at p. 147. 64 Section 40: Power of directors to bind the company



One of the most important qualifiers for the application of this article is Good Faith. Unless the

third party enters into a contractwith good faith, this section would not apply. The determination of

good faith or lack thereof can be determined with the aid of Sub-section (2) of Section 40 wherein

the entire doctrine of constructive notice is demolished. At the same time it provides for a

presumption of good faith on part of the third party. The threshold for determining mala fide is

pushed even higher when the section provides that even actual knowledge of incapacity of the

company to enter into that contract, may not mean mala fide on part of the third party.

However, a constructive reading of the section with section 41 makes it clear that Section 41 of the

act, that excludes corporate insiders from the protection granted to third parties as the company

reserves to declare such a transaction voidable so long as it involves one of the directors of the

company, its holding company or someone related to the director of the company.65

Also, one more exception exist on principle basis to Section 40: Charitable companies.

Chapter 3.3: Limitations of Section 40 and Turquand Rule

Section 40 seems to ignore that the board does not deal with the third parties except in ashes

where either the company is small or the transaction is too large. In practice the third party

generally deals with the executives of the company or a lower level employee who might not even

have a direct connection with the directors. Now, there might be a case where the constitution of

(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution. (2) For this purpose— (a) a person “deals with” a company if he is a party to any transaction or other act to which the company is a party, (b) a person dealing with a company— (i) is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so, (ii) is presumed to have acted in good faith unless the contrary is proved, and (iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution. (3) The references above to limitations on the directors’ powers under the company’s constitution include limitations deriving— (a) from a resolution of the company or of any class of shareholders, or (b) from any agreement between the members of the company or of any class of shareholders. (4) This section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors. But no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company. (5) This section does not affect any liability incurred by the directors, or any otherperson, by reason of the directors’ exceeding their powers. (6) This section has effect subject to— section 41 (transactions with directors or their associates), and section 42 (companies that are charities). 65 Gower and Davies’ Principles of Company law, 158-163 (8th edn., Paul L. Davies ed., 2008)

20



the company might not allow authorization of the officer to enter into contracts when such

authority in usual circumstances is attached to the position. But since there is no auhorisation by

the board here, a narrow construction of Section 40 might exclude the third party from the

protection of Section 40.

In such cases, Section 40 protection is supplemented by the Turquand Rule wherein the third

party is accorded protection so long as the conditions for the application of the Doctrine of Indoor

Management are applicable.

Finally, it has been held that the authority of the agent under Section 40 may be established

through establishment of ostensible authority. This is so because the Turquand rule only operates

if there is lack of power to delegate and thus lack of authorization from the board. This

construction ensures that the interests of the third party are balanced against the interests of the

agent.66

66 Id. At 173.



Chapter 4: Indian Position on the Doctrines of Constructive

Notice and Indoor Management

Chapter 4.1: Adoption and Treatment of the Doctrines of Constructive Notice

and Indoor Management in India

The Indian courts have since the early times shown a certain degree of caution and reluctance in

applying this doctrine to the detriment of the third party. The first application of the doctrine of

constructive notice, the the researcher could find, seems to be in the Charnock Collieries case67

in 1912. However, the mode application is typically the position before the Kreditbank and the

Houghton cases in the common law. The judge in this case simply holds that the stranger has an

obligation to read the articles of the company, but nothing beyond. Since the articles of the

company give the borrowing power to managing agents along with providing a security on the

company, the judge holds that the company is bound by the agent’s acts. As early as 1924, the

court in Mufassil Bank case,68 held that so long as the power of delegation exists in the articles

and the act of the agent is not hit by doctrine of ultra vires, the company is estopped from

denying its obligations under the contract in question. The same was continued in the Pratt

case.69

In Dehradun Mussourie Electric Tramway Co. case70 the issue was that the managing agents had

taken an overdraft without the approval of the board, despite the articles prohibiting the directors

from delegating the power to borrow. The court did not apply the doctrine and held that

temporary loans need to be taken for day to day working of the business. This was in application

of the rules of agency under the Indian Contract Act. Sections 188 and 189 of the act that

extensively empower the agent to take all necessary action to prevent losses to the principal

company. However, one point that is queer in this judgment is the issue of fact as to whether a

properly convened meeting took place to authorize the overdraft. The court takes into account

that the resolution signed was bogus as the evidence suggests that the required meeting never

took place and also that the third party might not have had notice of the same due to the false

representations made by the agent(the false minute-books stated that a meeting did take place),

67 Charnock Collieries Co. Ltd. v. Bholanath Dhar, (1912) ILR 39 Cal 810 68 Ram Buran Singh v. Mufassil Bank, AIR 1925 All 206 a 69 T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co., AIR 1936 Bom 62. 70 Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141.

22



the court still does not apply the Ruben rule71 to declare the document invalid. However, it does

apply the Turquand rule and binds the company to the transaction.

The first negative application of the Doctrine of Constructive Notice is found in the case of

Kotla Venkataswamy v. Rammurthy,72 where the doctrine was applied in its usual sense and the

third party mortgagee was denied relief on account of the transaction being irregular in nature.73

In Lakshmi Ratan Cotton Mills case74 the court once again accorded protection to the third party

by applying the Turquand Rule.

Chapter 4.2: Current Position Of Law in the Matter

The recent legal position has not changed and the courts continue to apply the ratio of

Deharadun Mussourie Tramways Case75 as recently as 2002 in the Kirlampudi Sugar Mills

case76 wherein the court again held that so long as the transaction benefits the company, the

company is bound by the acts of the agent and also that the indoor management rule would be

applicable.

In fact, indoor management rule has been expressly applied as recently as 2010, wherein, it was

used to attribute liability to the company in question and also, the court established that a

director of a company acts in a fiduciary role.77

Chapter 4.3: Indian Position on the Doctrines: Analysis

Indian law on agency and contracts has evolved differently from the Common law. One of the

most important reasons as to why the doctrines of Constructive notice and indoor management

do not gain a substantial foothold in the Indian Jurisprudence can be attributed to the Indian

Contract Act, 1872, that also deals with the law of agency in India. Section 188 of the act

71 Ruben v. Great Fingall Consolidated, [1906] AC 439 (House of Lords) 72 Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579 73 It is noteworthy that the court indeed takes into account the rule of ostensible authority, though not under the same name and holds that the authority of the agent would have appeared to be adequate to the mortgagee but irrespective of any such regard, the court has declared the mortgage deed invalid as it did not contain the signatures of the managing director as required under the articles of the company. 74 Lakshmi Ratan Lal Cotton Mills v. J.K. Jute mills Co., AIR 1957 All 311. 75 Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141. 76 Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP) 77 Punj Star Industries pvt. Ltd. v. Atna Engineering pvt. Ltd. and Ors., 2010 (120) DRJ 183. The last proposition will be further discussed in Chapter 4.4 as a necessary corollary to the judicial stand on the issue of agent overstepping his authority.



defines the extent of the authority of an agent.78 The section incorporates the usual authority rule

in it and thus, it is easier for the Indian judiciary to take the Freeman and Lockyer approach as

discussed in Chapter 2.3. Furthermore, it has been held that this section should be interpreted to

mean that where the terms of agency are ambiguous and the agent has acted in good faith as per

one construction of his authority, his acts would be binding on the principal.79 This same

rationale seems to have been applied in the Mussourie Tramways case80 wherein the agent was

held to be working for the benefit of the company.

Section 189 also is applicable in cases of agency with respect to a company wherein the agent is

granted the authority to do all such acts in emergency situations as would be necessary for

protecting the principal from loss.

These two sections cause a paradigm shift while evaluating the authority of an agent in the

Indian law. The burden upon the agent is not longer to prove that he/she had the authority to

perform a certain act but to prove either that their acts are for the benefit of the company or that

their acts were necessary to protect the company from loss. If that fact is proved, the agent’s acts

are binding, whether or not the articles of the company confer such authority upon him as

necessary for those acts. When the question of constructive notice has not arisen, the question of

application of the indoor management rule also does not arise. Simple application of the

principles of agency seems to be adequate for the purposes of this article.

Finally, the Doctrine of Indoor Notification also loses importance in light Section 86 of the

Companies act, 1913, that expressly endorses this rule.81 Thus, the Indian judiciary was never

really dealing with this issue on the same footing as the English judiciary. Our laws already

favour the third party’s rights in a transaction by bringing down the burden of proof on the third

party to apply the conditions necessary to apply the indoor management rule. Ideally, the judges

should have resorted to this rule in Lakshmi Ratan Lal Cotton mills case but this section was

enforced in the Albert Judan Judah Case.82 However, the 1956 act contains no analogous

provisions and thus, the judiciary has had to rely on principles of agency in most of the cases or 78 Section 188: “An agent havng having an authority to do an act has authority to do every lawful thing which is necessary inorder to do that thing. An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.” 79 Seethalakshami v. Narayan Swamy, (1922) 15 LW 205. 80 Dehradun Mussourie Electric Tramway Company v. Jagmandardas, AIR 1932 All 141. 81 Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP). 82 Albert J. Judaih v. Rampada Gupta, AIR 1959 Cal 715.

24



on the direct application of the indoor management rule with cases like Lakshmi Ratan Cotton

mills case as precedent.83

The recent Judgments in Kirlampud Sugar Mills case84 also shows that the judiciary is still

actively applying the law of agency in conjunction with the rule of Indoor management rather

expansively to provide benefits to the third party. This position is similar to the stance taken by

the Common law Judges in the United Kingdom. The only difference is that in the Common law,

this position is enforced by law as we have already seen in Chapter 3, while in India, first it was

due to section 86 of the 1913 Act and now, it is merely an extension of the judicial interpretation

of Section 188 of the Contract Act along with an expansive application of the Indoor

Management rule.

Chapter 4.4: Director as Fiduciary/Trustee or Agent?

This seemingly harmless question becomes extremely important in the Indian law because Indian

law views agency as distinct from trusteeship.85 This distinction is required to be made if we are to

claim that benefit accrued to the company from the acts of the directors binds the company to the

transaction. This kind of a proposition creates an impression of trusteeship. However, Palmer

strongly asserts that Directors are mere agents of the company in the eyes of the law but also tries

to clarify as to when they may act as trustees.86

He claims that while directors are the agents of the company, they are elected by the shareholders

to guard the their collective interests. In that sense they act as trustees to the shareholders’ interests

in the company. However, being in this dualistic positon, they are not entitled to claim benefits

from both sides. For Instance, he also points out that limitation under the Trustees Act may not 83 Such was the case in P.Rangaswami Reddiar v. R. Krishnaswami Reddiar, AIR 1973 Mad 251 wherein it was held that even where there was no actual resolution authorizing a director to enter into a transaction on behalf of the company either by the Board of directors or by the Board of managing Agents a claim of a creditor could not be affected if the terms of its memorandum and Articles of Association authorized such a transaction. It was also held that in such a case the person negotiating with a company is entitled to presume that all the formalities in connection therewith have been complied with. 84 Kirlampudi Sugar Mills Ltd. v. G. Nageshwara Rao, [2003] 114 CompCas 563 (AP). 85 T.S. Venkatesh Aiyer, LAW OF CONTRACTS AND TENDERS, 600 (10TH Edn., 2010): Aiyer holds that the trustee has much more power than an agent. The estate is legally vested in the trustee and he may do with it as he like, subject to the limitations envisaged in the instrument of trust. He is also vested with the power to sue in his own name with respect to the wrong done to the estate held in trust. However, an agent is more or less a mirror of the principal, to act as the principal would. He has no legal rights over the property of the owner. Also, he cannot sue or be sued, except in the name of the principal.The distinction between the two is however blurred due to the agent having powers to exceed his authority to protect the principal from loss or to achieve the final goal of his agency, thus encroaching into the field of Trusteeship. 86 Palmer’s Company Law, 527 (21st Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968); palmer insists that directors are agents of the company and treats their actions from a purely agency based perspective. Later on in the chapter he goes on to concede that they may act as both.



apply to them. But he final reaches the conclusion that the true nature of the director is that of a

fiduciary. 87 He has this fiduciary relationship with the company and not the shareholders

individually unless he is negotiating the terms for the sale of issued shares of the company.88

87 See Palmer at 526: The director for this reason is normally prohibited from contracting with himself in his personal capacity on one hand and himself as the agent of the company on the other. But this restriction doesn’t extend to him as a shareholder of the company and he may still vote on resolutions that may affect him in his personal capacity. Another implication is that the Director’s profits in the fiduciary position have to be accounted for infront of the company. 88 This relationship means that if an individual shareholder approaches the director in his personal capacity to trade his shares, he may not allege miuse of the fiduciary position in the law but where he is acting on behalf of the shareholders as indicated above, he is fully liable to the shareholders. In this case although the power is incidental to his position, its exercise will be on behalf of and directly affect the shareholders individually.

26



Conclusion

This research paper upon evaluation of the Doctrine of Constructive Notice and Indoor

management has finally reached the conclusion that the doctrine have needlessly complicated the

simple matter which could have easily been resolved by a simple application of the rule of

Ostensible authority. The approach of Constructive Notice was so radically inclined to support the

Company that the reactions to it all came to support, almost phanatically, the third parties. While

Constructive Notice Blindly supported the company to an illimitable extent, the rule of indoor

management supported the third party just as blindly. Finally, law of agency was required to repair

that damage as was seen in various cases where ostensible authority became a pre-requisite for the

application of indoor management rule.

This is the position in common law until the sudden arrival of Companies act 1989, that suddenly

decided to introduce several conflicting provisions to abolish constructive notice. Almost, as if

giving a second thought, the English parliament never brought Section 711A into force or there

might have been Himalayan difficulties in interpretation and application of this provision that bit on

its own tail.

Contract this common law muddle with the Indian law, where the Companies act 1913 expressly

endorsed the indoor management rule. Later, although the 1956 act did not contain any such

analogous principles, the Indian law seems to treat the directors as fiduciaries or trustees of the

company and so long as their acts are benefitting the company, they bind the company. This

principal is further enforced by the provisions of the Indian Contract act, related to agency, wherein

it was held that agents’ power is to do anything lawful to achieve the object of agency and also that

agents can do any legal thing they like, if there is an emergency, to prevent losses to the principle.

Thus, except for a rare breed of cases where constructive notice was applied, Indian courts have

been immune to useless complications in the form of constructive notice and consequently Indoor

management.



Bibliography

Table of Books:

1. Boyle and Bird’s Company Law, (1st Indian Reprint, 1997)

2. Bowstead and Renold’s on Agency, (F.M.B. Reynolds ed., 16th Edn., 2001)

3. G.H.L. Fridman, THE LAW OF AGENCY (4th edn., 1976)

4. Gower and Davies’ Principles of Company law (8th edn., Paul L. Davies ed., 2008)

5. L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW (7th edn., 2001).

6. Palmer’s Company Law, (21st Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968)

7. Robert R. Pennington, COMPANY LAW, (8th edn., 2001)

8. T.S. Venkatesh Aiyer, LAW OF CONTRACTS AND TENDERS, 600 (10TH Edn., 2010)

9. Vincent Powell-Smith, THE LAW AND PRACTICE RELATING TO COMPANY DIRECTORS,

(1969).

Table of Articles

1. I.D. Campbell, Cntract with companies: II – The Indoor Management Rule, Vol. 76,

LAW QUARTERLY REVIEW, 115 (January 1960).

2. Krishnayen Sen, Rule of Constructive notice Vis-à-vis the Doctrine of Indoor

Management, Vol.11, COMPANY LAW CASES, 732 (2003).

3. J.S. McLennan, Demise of Constructive Notice Doctrine in England, Vol. 103, SOUTH

AFRICAN LAW JOURNAL, 558 (1986)

4. J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50, Law

Quarterly Review, 224 (1934).

28



Annotated Bibliography

Books:

1. Gower and Davies’ Principles of Company law (8th edn., Paul L. Davies ed., 2008)

Gower in the relevant part of his book has explained the current legal position on the issue

of the legal validity of the rule of indoor management and the doctrine of constructive

notice. He has not only comprehensively explained the ambit of Section 40 of the english

Companies Act 2006, that deals with the doctrines of ultra vires and constructive notice.

Most importantly, he has highlighted the limitations and internal contradictions in the

drafting of this section. He also highlights the assistive and complementary role of the

Turquand rule with respect to section 40.

Gower also highlights the exceptions from the ambit of Section 40, such as charitable

companies and special provisions for the employees.

2. Palmer’s Company Law, (21st Edn., C.M. Schmitthoff & J.H. Thomson eds., 1968)

Palmer, in the twenty first edition of his book, has brought out a clear and comprehensive

discussion on the true nature of the power with a director. He has well highlighted the

directors' position as being neither entirely that of an agent, nor completely that of a trustee.

However, he does hold them to be fiduciaries.

He also highlights the restrictions placed on the directors with respect to their dealings with

the company.

3. Bowstead and Renold’s on Agency, (F.M.B. Reynolds ed., 16th Edn., 2001)

Bowstead and Reynolds are one of the most celebrated authors on the law of agency. They

have explained the fundamental rules of agency comprehensively. While explaining the

rule of agency, they have well elaborated doctrine of apparent authority as well as the limits

of the doctrine. He also explains the concept of agency with respect to companies. He goes

on to discuss the doctrines of constructive notice and indoor management breifly, yet

effectively.

He then goes on to explain the current position of law under english kaw. However, owing

to the publishing of this book before the 2006 act was passed, the book only deals with the

changes made through the companies act 1989.

Nonetheless, it deals well with the issue of estoppel as a basis for ostensible authority in an

elucid manner.

4. Boyle and Bird’s Company Law, (1st Indian Reprint, 1997)



This book has provided a succinct and lucid explanation to the introduction of general

agency principles and the reason behind their introduction. It also clarifies the distinct

circumstances where general agency principles might be applied, i.e., in cases where the

authority is inexistent, not merely defective.

It also goes on to explore various facets of the doctrine of indoor management and its

various requirements.

5. Vincent Powell-Smith, THE LAW AND PRACTICE RELATING TO COMPANY DIRECTORS,

(1969):

This book has mostly been used in reference to determining the true nature of the indoor

management rule vis-à-vis the doctrine of constructive notice as well as to determine the

class of cases where the rule of indoor management may or may not apply.

6. G.H.L. Fridman, THE LAW OF AGENCY (4th edn., 1976)

This book has been useful for the researchers to understand the reasoning of the judges in

the Freeman and Lockyer case with regards to the purely Negative nature of the Doctrine

of Constructive Notice.

7. L.S. Sealy, CASE AND MATERIALS IN COMPANY LAW (7th edn., 2001).

Sealy has been an extremely useful resource for the researchers. While it does not go into

many details of the theories, it has given a brilliant background to the researchers alond

with a ready reference to relevant cases and judgment excerpts on each topic.

Sealy has also documented the changes in british law quite well and analysed in few words

but effectively, the toothlessness of the 1989 provisions.

Cases:

1. Royal British Bank v. Turquand, (1856) 6 E & B 327 (Exchequer Chamber)

Facts of the case: The defendant in this case, Turquand was sued in his capacity as

manager of a coal mining and railway company on a bond for £2000 by the plaintiff bank

to secure its drawings on the same. The bond had been duly signed under the seal of the

company by two directors. However, the company argued that under its registered deed of

settlement, directors only had power to borrow such sums that had been authorized by a

general resolution of the company. No sufficiently specific resolution had occurred in this

case.

Holding of the Court: Here, the Court of Exchequer Chamber affirmed the judgment of

the Court of Queen’s bench, holding that despite its objection, the company was still

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bound. The Court was of the view that there was a resolution passed authorizing directors

to borrow such sums at such rates of interest that they might deem expedient. The only

thing lacking in the resolution was that it did not specify exactly the amount to be

borrowed. It felt that there was an obligation on the partner companies simply to read the

statute and the deed of settlement and upon doing so, in the Court’s view, it would be

found that there was not a prohibition on borrowing but merely the requirement of

permission to do so under certain conditions. It would be a valid assumption that the

requisite resolution had been passed authorizing that which on the face of the document

appeared to be legitimately done.

2. Mahony v. East Holyford Mining Co., (1875) LR 7 HL 869 (House of Lords)

Facts of the case: Mahony was sued by the liquidator of the respondent company in his

capacity of public officer of National Bank, Dublin on the ground that he had paid moneys

from the company’s account without due authorization. The Bank had acted on a letter

containing a resolution authorizing the bank to pay cheques that were signed by any two of

the three directors named in the letter and countersigned by the secretary of the company

named in the latter. This was in consonance with the memorandum and articles of the

company and would have been valid except for the fact that there had not been any proper

appointment of directors or of a secretary and these roles had simply been assumed by

those who formed the company.

Holding of the Court: The House of Lords held that the company was bound by the

cheques honoured by the bank in accordance with the instructions of the letter. The Court

once again emphasized the obligation placed upon those dealing with a company to be

familiar with the provisions of its articles and memorandum so as to have an idea of what

it is authorized to do. It draws a distinction between what it calls the ‘external powers’ of

a company, which any person engaging in business with the company is deemed to know,

and what it terms ‘indoor management’ which one dealing with the company it not

presumed to be aware of. Thus, in accordance to what was available to the Bank, namely

the statute and the articles and memorandum of the company, the instructions in the letter

were valid. Hence, it was legitimate for the Bank to assume that the cheque signed by the

directors was signed by persons duly appointed for the purpose of performing such

function. Hence, the company would be bound by the cheques in question.



3. Hely-Hutchinson v. Brayhead Ltd., [1968] 1 QB 549, [1976] 3 All ER 98 (Chancery

Divison and Court of Appeal)

Facts of the case: The plaintiff was suing to enforce two letters of indemnity which

signed by the chairman of the defendant company. The defendant, inter alia, argued that

since the plaintiff happened to be a director of the defendant company, he should be

presumed to know that the chairman had not been authorized to act in that matter.

Holding of the Court: The Court rejected this argument. It was of the view that when a

director of a company was contracting with the company in a capacity other than that of a

director of the company, it would be unfair to constructively impute knowledge regarding

disabilities and limitations on the part of the director that he would fairly be presumed to

know were he acting for the company in the transaction. Thus, in this case, since the

plaintiff was acting in a capacity other than as a director, namely as the other party to the

contract, it would be unfair for him to be deemed to have known about the powers and

limitations placed upon members of the company. The Court distinguishes two cases,

namely Morris v. Kansen and Howard v. Patent Ivory Co. on the ground that in those

cases, the acts done by the directors in their personal capacity were very closely

interwoven with the acts to be done by them as directors, and hence it would be

reasonable to impute knowledge upon them in such cases.

4. Biggerstaff v. Rowatt’s Wharf Ltd., [1896] 2 Ch 93 (Court of Appeal)

Facts of the case: In consideration for certain case advances, the managing director of the

defendant company signed letters hypothecating various debts to the concerned party.

According to the articles, the directors were authorized to appoint a managing director

and delegate to him the power of hypothecating debts. There was no minute showing

which powers had been delegated to the managing director in question, though he had

exercised the power to hypothecate.

Holding of the Court: The Court held that the hypothecations were valid because the

managing director was validly appointed and according to the articles, the directors had

the power to delegate the authority to hypothecate to him. Thus, it was legitimate for the

other party to assume that this had been done. An irregularity in the exercise of a given

power to delegate authority to an agent is immaterial to a person dealing with such agent

bona fide and without notice of such irregularity in the agent’s authority. Hence, the

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hypothecations made by the managing director in this case would be enforceable against

the company.

5. Houghton & Co. v. Northard Lowe & Wills Ltd., [1927] 1 KB 246 (Court of Appeal)

Facts of the case: The director of the defendant company purported to assign the right to

receive and dispose of certain shipments to the plaintiff company though he had no actual

authority to commit the company to such a contract. Later, the secretary of the defendant

company wrote a letter affirming this agreement, but he too had no authority to do so.

Holding of the Court: The Court held that the defendant company was not bound by the

contract. The plaintiffs had argued that since there was a power to delegate contained in

the articles, which had not been exercised by the defendants, it would be immaterial to the

plaintiff that the power in fact had not been exercised. However, the Court was of the

view that this condition would be applicable only in a case where it could be shown that

the plaintiffs had knowledge of the existence of this power within the articles of the

defendant company on the date of execution of the contract and had hence assumed that

the same had been exercised. It was also of the view that the plaintiff could have relied on

the delegation of power if it had in fact occurred irrespective of whether or not it had

known that the defendants had the power to do so. But since it could not be shown that

there was knowledge as to the defendant company’s power to delegate such authority with

the plaintiff, this rule would not apply.

6. British Thomson-Houston Co. Ltd. B. Federated European Bank Ltd., [1932] 2 KB 176

(Court of Appeal)

Facts of the case: The defendant company had guaranteed another company’s debt in a

letter signed by the chairman of the board of directors of the defendant company. The

articles empowered the board to delegate to a single director the requisite powers. The

defendants argued that the chairman had not been authorized in this way and thus had no

power to bind the company.

Holding of the Court: The Court held that the defendant company was bound by the

agreement as it was reasonable for the plaintiff to assume that the power to delegate the

chairman with the requisite power that was contained within the articles of the company

was exercised by the directors of the defendant company. Here, the defendants held out



that the chairman had the power to enter into such a guarantee on behalf of the defendant

company and hence they should be held bound by such guarantee.

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7. Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480

Facts of the case: Mr Freeman and Mr Lockyer sued Buckhurst Park Ltd and its director,

Shiv Kumar Kapoor, for unpaid fees for their architecture work on developing the

‘Buckhurst Park Estate’ in Sunninghill, Berkshire. The company’s articles said that all four

directors of the company (another Mr Hoon, who was never there, and two nominees) were

needed to constitute a quorum. Originally the company planned to simply buy and resell the

land, but that fell through. Kapoor had acted alone (as if he were a managing director) in

engaging the architects, without proper authority. The company argued it was not bound by

the agreement.

Judge Herbert at Westminster County Court held the company was bound, and the

company appealed.

Holding of the Court: This case has dealt with the issue of apparent authority in detail and

distinguishes it from actual authority. To establish apparent authority some of the

prerequisites are given as four conditions:

“(1) that a representation that the agent had authority to enter on behalf of the company

into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had "actual" authority

to manage the business of the company either generally or in respect of those matters to

which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract,

that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company was not deprived of

the capacity either to enter into a contract of the kind sought to be enforced or to delegate

authority to enter into a contract of that kind to the agent.”

This case also providesa conclusive opinion on the negative nature of the doctrine of

Constructive Notice. This case being probably the most important case covered in this

research paper, the researcher has quoted relevant excerpts from this case below:

“To recognize that these are direct consequences of the doctrine of ultra vires is, I think,

preferable to saying that a contractor who enters into a contract with a corporation has

constructive notice of its constitution, for the expression "constructive notice" tends to

disguise that constructive notice is not a positive, but a negative doctrine, like that of



estoppel of which it forms a part. It operates to prevent the contractor from saying that he

did not know that the constitution of the corporation rendered a particular act or a

particular delegation of authority ultra vires the corporation. It does not entitle him to say

that he relied upon some unusual provision in the constitution of the corporation if he did

not in fact so rely.

The second characteristic of a corporation, namely, that unlike a natural person it can only

make a representation through an agent, has the consequence that in order to create an

estoppel between the corporation and the contractor, the representation as to the authority

of the agent which creates his "apparent" authority must be made by some person or

persons who have "actual" authority from the corporation to make the representation. Such

"actual" authority may be conferred by the constitution of the corporation itself, as, for

example, in the case of a company, upon the board of directors, or it may be conferred by

those who under its constitution have the powers of management upon some other person

to whom the constitution permits them to delegate authority to make representations of this

kind. It follows that where the agent upon whose "apparent" authority the contractor relies

has no "actual" authority from the corporation to enter into a particular kind of contract

with the contractor on behalf of the corporation, the contractor cannot rely upon the

agent's own representation as to his actual authority. He can rely only upon a

representation by a person or persons who have actual authority to manage or conduct that

part of the business of the corporation to which the contract relates.

The commonest form of representation by a principal creating an "apparent" authority of

an agent is by conduct, namely, by permitting the agent to act in the management or

conduct of the principal's business. Thus, if in the case of a company the board of directors

who have "actual" authority under the memorandum and articles of association to manage

the company's business permit the agent to act in the management or conduct of the

company's business, they thereby represent to all persons dealing with such agent that he

has authority to enter on behalf of the corporation into contracts of a kind which an agent

authorized to do acts of the kind which he is in fact permitted to do usually enters into in

the ordinary course of such business. The making of such a representation is itself an act of

management of the company's business. Prima facie it falls within the "actual" authority of

the board of directors, and unless the memorandum or articles of the company either make

such a contract ultra vires the company or prohibit the delegation of such authority to the

36



agent, the company is estopped from denying to anyone who has entered into a contract

with the agent in reliance upon such "apparent" authority that the agent had authority to

contract on behalf of the company.”

8. Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579

Facts of the Case: The articles of association of a company required that all the deeds

should be signed by the Managing Director, the secretary and a working director on

behalf of the Company. The Plaintiff accepted a deed of mortgage executed by the

secretary and the working director only.

Holding of the court: The High Court applied the rule of constructive notice and held

that the deed is invalid irrespective of the bona fide exercise of the third party’s rights.

9. Dehradun Mussourie Electric Tramway Co. v. Jagmandardas, AIR 1932 All 141

Facts of the Case: The managing agents of the company took a temporary loan without

authorization from the directors as required by the articles. Later they misrepresented to

the third party that the loans were sanctioned by a board meeting which in reality, never

took place.

Holding of the Court: This decision is a landmark judgment in Agency law as applicable

to Company Law. The court resorted to Sections 188 and 189 of the Contract Act and

held that it is necessary for the agents to take such temporary loans for day to day running

of the company and they are empowered to do so under the law of agency to keep the

business running without losses to the company. This approach is still being followed,

though not as expressly in the Indian law where the entire case hinges on the fact as to

whether the company accrued profit on the transaction or not.

Lakshmi Ratan Lal Cotton Mills v. J.K. Jute Mills Co., AIR 1957 All 311

Facts of the Case: Gulabchand Jain (G) was the director of a company as well as one of

the managing agents. Articles of the company allowed for the power to borrow money to

be exercised by the directors or be delegated to others by them. G borrowed a sum of

money from the plaintiffs without any resolution of the board authorizing him to borrow

the money.



Holding of the Court: The court held that even though there might have been no actual

delegation, it is a matter of internal management and the company is still bound by the

loan.

Articles:

1. I.D. Campbell, Contract with companies: II – The Indoor Management Rule, Vol. 76,

LAW QUARTERLY REVIEW, 115 (January 1960).

This article is extremely comprehensive and has served to provide the researchers with a

good understanding of the topic. This article covers the Doctrine of indoor management as

well as the issues of agency such as role of directors as well as Ostensible Authority. It

provides a well organized analysis, beginning with the basis of the Doctrine of Indoor

management and goes on to analyze its wider functions than to merely serve as a limiting

factor to the Doctrine of Constructive Notice.

It also deals with the issues of application of the Doctrine of Constructive Notice in favor

of the third party as well as implications of the fraud of the agent on the contract in

question. Its analysis of the position of law with regard to De facto agents is also important

and a rarity as most articles do not pay this facet of the Indoor management rule adequate

attention.

2. J.S. McLennan, Demise of Constructive Notice Doctrine in England, Vol. 103, SOUTH

AFRICAN LAW JOURNAL, 558 (1986)

This article dates back to 1986 and is an extensive commentary on the case of TCB Ltd. v.

Gray, which is known to have demolished the Doctrine of Constructive Notice completely.

It also comments on the provisions of the European Directive that was the basis for such

abolition.

It also comments on the status of the doctrine in other common law countries as well and

what masures they have taken to abolish the rule of constructive notice.

3. J.L. Montrose, the Apparent Authority on an Agent of a Company, Vol. 50, Law

Quarterly Review, 224 (1934).

This articledeals with the issue of apparent authority of an agent of a company in great

detail and provides some useful insights to determine whether the agent in question has

apparent authority or not. It als defines and distinguished apparent authority from actual,

implied authority that is very important for this research paper.

38



It also critically evaluates the ambit of the doctrine of constructive notice and its

relationship with the general rules of agency and gives a detailed explanation of the

negative nature of the doctrine.