The doctrine of Constructive Notice and Doctrine of Indoor Management

Notice is the giving of information to somebody. Notices are used in all litigations and otherwise to keep parties, attorneys, etc informed of dates, facts and proceeds. There are two kinds of notices, Constructive notice and internal management. This blog illustrates through cases and explains the same.

There are various types of notice with doctrine of constructive notice, each of which has different results. In general, notice deals with information that a party knows or should have known. In this context notice is an essential element of Due Process. Notice can also refer to commonly known facts that a court or Administrative Agency may take into evidence. [2] Actual notice is information given to the party directly. The two kinds of actual notice are express notice and implied notice. An individual is deemed to have been given express notice when he or she actually hears it or reads it. Implied notice is deduced or inferred from the circumstances rather than from direct or explicit word. Courts will treat such information as though actual notice had been given. [3] Constructive notice is information that a court deems that an individual should have known. According to a Rule of Law that applies in such cases, the court will presume that a person knows the information because she could have been informed if proper diligence had been exercised. Constructive notice can be based on a legal relationship as well. For example, in the law governing partnerships, each partner is deemed to have knowledge of all the partnership business. If one partner engages in dishonest transactions, the other partners are presumed to know, regardless of whether they had actual knowledge of the transaction. The term legal notice is sometimes used interchangeably with constructive notice. [4]

In a certain case involving the purchase of real property, an individual is charged with inquiry notice. When an individual wishes to purchase land, he ordinarily has the duty under the recording acts to check the title to the property to determine that the land is not subject to any encumbrances, which are claims, liens, mortgages, leases, easements or right of ways, or unpaid taxes that have been lodged against the real property. In some situations, however, the individual must make a reasonable investigation outside of records, such as in cases involving recorded but defective documents. This type of notice is known as inquiry notice. [5]

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The doctrine of Constructive Notice

The ‘doctrine of constructive notice’ is an unreal doctrine at least in the Indian state. 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.[6] In Dehra Dun Mussoorie Electric Tramway Co. v. Jagmandardas, where it was held that the company was bound by the mortgage so far as the company law is concerned on the question whether the mortgage deal which was entered into by their managing agent, even though in the Articles of Association it was expressly prohibited the Board of Directors from delegating their borrowing power was binding on the company. [7]

In the case of Sharfudin Valad Tajudin And Ors. vs. Govind Bhikaji Bade And Ors. [8] it was stated “And when it was argued that the defendant had notice of the unregistered document through the registered document, the Court held that it would be pushing the doctrine of constructive notice beyond all bounds to held that it is notice of the unregistered documents under which the holders derived their title.”

In another case of Haji Abdul Gafur Haji Hussenbhai vs The Ahmedabad Municipal [9] a question was raised that, how far the doctrine of constructive notice affects an auction purchaser who purchases at a sale held by the Court in execution of a decree, property which is subject to a charge in favour of the Municipal Corporation for arrears of municipal taxes. The learned Assistant Judge observed that though it was true that the plaintiff had no actual notice of the charge at the date when he purchased the suit property, the plaintiff had certainly constructive notice of the charge and he could not, therefore, be said to have received the suit property free from the charge. The learned Assistant Judge accordingly took the view that the suit property was liable for the payment of arrears of municipal taxes and that the plaintiff was not entitled to a declaration that the municipal taxes were not recoverable from the suit property.

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Therefore, it can be said that unless there is a willful or fraudulent act by the party, the doctrine of constructive would not apply.

The doctrine of Indoor Management

In Royal British Bank v Turquand [10] in this case the doctrine of indoor management was enumerated:” The facts of the said case were that Turquand was the office manager of the company. A bond under the seal of the company, signed by two directors and the secretary, was given by the company to the Royal British Bank to secure drawings on its current account. In an action based on the bond the company defended pleading that under the terms of the registered deed of settlement, the directors had the power to borrow only such sums as had been authorized by general resolution of the company and since no sufficiently specific resolution had been passed by the company, it was not liable to make payment to the Bank. The Court of Exchequer Chamber overruled the objection and held that the bond was binding on the company. The relevant portion of the said decision reads as under:-

“The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorised to be borrowed : and the replication shows a resolution passed at a general meeting, authorising the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and Act of Parliament; but the resolution does not define the amount to be borrowed. That seems to be enough……We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more.

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And the party here on reading the deed of settlement, would find, not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appear to be legitimately done.”

Meena Chawla vs Prism Entertainment Pvt. Ltd. [11] “In a nutshell, the gist of the doctrine is that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they had no notice. This doctrine, which is based on the general presumption of law, is eminently practical, for business could not be carried on if a person dealing with the company is compelled to call for the evidence that all internal regulations had been duly observed by the company before entering into a transaction. But, the doctrine self-limits itself in view of the portions underlined while quoting the relevant paragraph from the decision, as reproduced in para 23 above, i.e. the non-obligation to make an inquiry would not extend to Statutes and The Deed of Settlement i.e. The Articles of Association and the Memorandum of a Company”

Also read The doctrine of ‘Rarest of the rare’ case.

End Notes:

[1] https://legal-dictionary.thefreedictionary.com/notice

[2] Ibid

[3] Ibid

[4] Ibid

[5] Ibid

[6] http://www.lawyersclubindia.com/articles/Doctrine-of-Constructive-Notice-3133.asp

[7] Dehra Dun Mussoorie Electric Tramway Co. v. Jagmandardas, AIR 1932 All 141

[8] SharfudinValadTajudin And Ors., … vs GovindBhikaji Bade AndOrs., (1904) ILR 27 Bom 294

[9] Haji Abdul Gafur Haji Hussenbhai vs The Ahmedabad Municipal, (1967) 8 GLR 65

[10] Royal British Bank v Turquand, (1856) 6 E & B 327

[11] Meena Chawla vs Prism Entertainment Pvt. Ltd., 2011 RFA (OS) 48/2011 & 59/2011