Indoor Management

Topics: Board of directors, Corporation, Ostensible authority Pages: 5 (1820 words) Published: January 11, 2009
Doctrine of indoor management Memorandum of Association and articles of association are two most important documents needed for the incorporation of a company. The memorandum of a company is the constitution of that company. It sets out the (a) object clause, (b) name clause, (c) registered office clause, (d) liability clause and (e) capital clause; whereas the articles of association enumerate the internal rules of the company under which it will be governed. Undoubtedly, both memorandum of association and the articles of association are public documents in the sense that any person under section 610 of Indian company act, 1956 may inspect any document which will include the memorandum and articles of the company kept by the registrar of companies in accordance with the rules made under the destruction of records act, 1917 being documents filed and registered in pursuance of the act. As a consequence, the knowledge about the contents of the memorandum and articles of a company is not necessarily restricted to the members of the company alone. Once these documents are registered with the registrar of companies, these become public documents and are accessible by any members of the public by paying the requisite fees. Therefore, notice about the contents of memorandum and articles is said to be within the knowledge of both members and non-members of the company. Such notice is a deemed notice in case of a members and a constructive notice in case of non-members. Thus every person dealing with the company is deemed to have a constructive notice of the contents of the memorandum and articles of the company. An outsider dealing with the company is presumed to have read the contents of the registered documents of the company. The further presumption is that he has not only read and perused the documents but has also understood them fully in the proper sense. This is known as the rule of constructive notice. So, the doctrine or rule of constructive notice is a presumption operating in favour of the company against the outsider. It prevents the outsider from alleging that he did not know that the constitution of the company rendered a particular act or a particular delegation of authority ultra *vires*. The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas_, _the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power. The doctrine of indoor management is an exception to the rule of constructive notice. It imposes an important limitation on the doctrine of constructive notice. According to this doctrine “persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed”. A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles. Even though he may find out the procedural aspect, he cannot find out whether the procedure has been followed or not. For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles....
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