Doctrine of Constructive Notice This doctrine provides that persons dealing with a company are deemed to have knowledge of

whatever is contained in the company's constitution and other public documents of the company,

especially as it relates to the powers, functions and duties of the company’s directors. The basis

of this imputation is that these are public documents and therefore open to inspection by

anybody.

The doctrine operates on the assumption that people doing business with a company will be

sufficiently motivated to check the company's constitution or other public documents to ensure

that the transaction they are entering into is not only allowed but to determine whether there are

any internal formalities that must be complied with.

The end result of the doctrine of constructive notice is that an individual or juristic entity that

deals with a company is presumed to be informed of any required internal formalities or

constraints prescribed by the company's public documents, mainly the constitution, relating to

the transaction and the authority of the person representing the company in the transaction. The

individual or entity is thus prohibited from denying knowledge of the formalities or constraints.

The built in proviso to the doctrine, as held in Central Merchant Bank Ltd v Oranje Benefit

Society 1975 4 SA 588, is that a company that fraudulently misleads a person into contracting

with it on the basis that its directors or agents have the necessary authority to do so, cannot then

use the doctrine as a defence in a subsequent delictual claim against the company by alleging

that the directors did not have the necessary authority to transact and that the claimant had

constructive knowledge of this fact.

The doctrine of constructive notice is mitigated by the rule developed in the English case of

Royal British Bank v Turquand 1856 119 ER 886. In this case the rule, known as the Turquand

rule, was put forward as being that although a person dealing with a company has constructive

notice of all the internal formalities required by the company's constitution with regards to the

transaction, the person does not have constructive knowledge of whether the internal formalities

have been complied with and the person is not obliged to enquire if the formalities have been

complied with.

The effect of the rule is that where a party completes a transaction with a company and the

transaction is deemed void due to the fact that the person representing the company lacked

authority and the only reason the representative lacked authority was due to non-compliance

with an internal formality, the company may still be held liable and may not rely on the doctrine

of constructive knowledge.

The Turquand Rule only applies where the persons purporting to act for the company holds the

positions they purport to hold either de facto or de jure and the other party was transacting with

the company in good faith.

Doctrine of indoor management 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. They can presume that all is being

done regularly.

The doctrine of indoor management is also known as the TURQUAND rule. The rule is based

on public convenience and justice and the following obvious reasons:

1. The internal procedure is not a matter of public knowledge. An outsider is presumed to

know the constitution of a company, but not what may or may not have taken place

within the doors that are closed to him.

2. The lot of creditors of a limited company is not a particularly happy one; it would be

unhappier still if the company could escape liability by denying the authority of officials

to act on its behalf.

Exceptions to the doctrine of indoor management:

1. Knowledge of irregularity: when a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim

benefit under the rule of indoor management. He may in some cases, be himself a part of

the internal procedure. The rule is based on common sense and any other rule would

encourage ignorance and condone dereliction of duty.

2. Negligence: where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management.

The protection of the rule is also not available where the circumstances surrounding the

contract are so suspicious as to invite inquiry, and the outsider dealing with the company

does not make proper inquiry. If, for example, an officer of a company purports to act

outside the scope of his apparent authority, suspicion should arise and the outsider should

make proper inquiry before entering into a contract with the company.

3. Forgery: the rule in turquand's case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can

never be held bound for forgeries committed by its officers.

4. Acts outside the scope of apparent authority: if an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his

authority, the company is not bound. In such a case, the plaintiff cannot claim the

protection of the rule of indoor management simply because under the articles the power

to do the act could have been delegated to him. The plaintiff can sue the company only if

the power to act has in fact been delegated to the officer with whom he entered into the

contract.

Conclusion

Thus the doctrine of indoor management seeks to protect the interest of the shareholders who are

in minority or who remains in dark about whether the working of the internal affairs of the

company are being carried out in accordance with the memorandum and articles. It lays down

that persons dealing with a company having satisfied themselves that the proposed transaction is

not in its nature inconsistent with the memorandum and articles, are not bound to inquire the

regularity of any internal proceeding.