Page 83 - DCOM106_COMPANY_LAW

Company Law

Notes
Example: In Brown v. British Abrasive Wheel Co. (1919) 1 Ch. 290, the majority which
held 98 per cent of the shares passed a special resolution that upon the request of holders of
9/10th of the issues shares, a shareholder shall be bound to sell and transfer his shares to the
nominee of such holders at a fair value. The alteration was held to be invalid since it amounted
to an oppression of minority.
There cannot be alteration of the articles so as to compel the existing members to take or
subscribe for more shares or in any way to contribute to the share capital, unless they give
their consent in writing (s.38).

An alteration of articles to effect a conversion of a public company into a private company
cannot be made without the approval of the Central Government (s.31).
A company cannot justify breach of contract with third parties or avoid a contractual
liability by altering articles.
The amended regulation in the Articles of Association cannot operate retrospectively, but
only from the date of amendment [Pyare Lal Sharma v. Managing Director, J & K Industries
Ltd.].

6.6 Doctrine of Indoor Management

The doctrine of constructive notice throws a burden on people entering into contracts with the
company that they are presumed to have read the documents, though in fact, they might not
have read them. On the other hand, the doctrine of indoor management allows all those who
deal with the company to assume that the provisions of the articles have been observed by the
officers of the company. In other words, they are not bound to enquire into the regularity of
internal proceedings. An outsider is not expected to see that the company carries out its internal
regulations.

Example: The directors of a company were authorised by the articles to borrow on bond
such sums of money as should from time to time, by a resolution of the company in general
meeting, be authorised to be borrowed. The directors gave a bond to T without the authority of
any such resolution. The question arose whether the company was liable on the bond.
Held: The company was liable on the bond, as T was entitled to assume that the resolution of the
company in general meeting had been passed [The Royal British Bank v. Turquand (1856) 6 E &
B 327].
Exceptions: The doctrine of indoor management is subject to the following exceptions:
1. Knowledge of Irregularity: The rule does not protect any person who has actual or
constructive notice of the want of authority of the person acting on behalf of the company.

Example: The articles of a company empowered the directors to borrow up to 1,000.
They could exceed the limit of 1,000 with the consent of the company in general meeting.
Without such consent, they borrowed 3,500 from themselves and took debentures. The company
refused to pay the amount. Held: Their debentures were good to the extent of 1,000 only as they
had notice of the internal irregularity [Howard v. Patent Ivory Co., (38 Ch. D. 156)].
2. No Knowledge of Articles: The rule cannot be invoked in favour of a person who did not
consult the memorandum and articles and thus, did not rely on them.

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