Doctrine of Constructive Notice –
After a company is registered, its memorandum and articles of association become “public documents”. The memorandum and articles of association of a company are public documents and are open to inspection by anyone by payment of a nominal fee. Hence it is presumed that every person dealing with the company has read these documents and understood them before entering a contract with the company. This is known as Doctrine of constructive notice.
The effect of this doctrine is that a person dealing with a company cannot hold the company liable for any dealings inconsistent with the memorandum due to default on his part or due to his negligence.
Exception to Doctrine of Constructive Notice
- Forgery cases
- In case the outsiders had prior knowledge of the irregularities of the company.
- In case the outsiders are negligent.
Doctrine of Indoor Management
The doctrine of constructive notice provides that, people while dealing with a company are presumed to have read “public documents” and understood its contents and therefore cannot hold the company liable for any irregularities in dealing due to their negligence. The doctrine of Indoor management is an exception to this. This rule provides that people while dealing with a company are entitled to assume that the internal requirements and regulations prescribed by the public documents have been met by the officials of the company and they are not bound to enquire about regularities of internal proceedings of the company.
However people dealing with the company must see that the proposed dealings are consistent with the memorandum and articles. The effect is that the company can be held liable for any dealings conducted by it in an unfair or irregular manner i.e. if the internal formalities have not been completed.
Exceptions to Doctrine of Indoor Management
- This rule does not protect a person if he/she has prior knowledge of the irregularity
- The rule cannot protect any person who did not study the company’s memorandum and articles before entering into a contract i.e. on part of his negligence
- This rule does not apply in case of forgery i.e. in case the outsider relies on forged documents to claim protection under the rule.
- This rule also does not apply to transactions which are illegal and void.
- A person must make proper enquiries about the person who is dealing on behalf of the company. If he fails to make enquiry he cannot rely on the rule.