Page 243 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Self Assessment

Fill in the blanks:
10. The memorandum and articles, when registered, become ……………….documents.
11. Every person dealing with the company is presumed to have read its articles &
memorandum and, understood them in their……………………; this is known as ‘Doctrine
of Constructive notice.
12. After registration Articles and memorandum can be inspected by anyone on payment of
a……………….

10.5 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 vs. Turquand supra].

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 vs. Patent Ivory Co. (1888) 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.

Example: T was a director in an investment company. He, purporting to act on behalf of
the company, entered into a contract with the Rama Corporation and took a cheque from the
latter. The articles of the company did provide that the directors could delegate their powers to
one of them. But Rama Corporation never read the articles. Later, it was found that the directors
of the company did not delegate their powers to T. Plaintiffs relied on the rule of Indoor
Management.

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