Constructive notice and the doctrine of indoor management

1. Constructive notice

The memorandum and articles, once registered, become public documents. Any person may inspect documents kept by the Registrar on payment of the prescribed fee (section 399), and the company must supply copies to members (section 17). From this the courts drew the rule that every person dealing with a company is deemed to have notice of the contents of its memorandum and articles, and of the extent of the powers they confer, whether or not he has actually read them: Ernest v. Nicholls (House of Lords, 1857); Oakbank Oil Co. v. Crum (1882).

Consequences:

• An outsider who enters into a transaction beyond the company's objects, or beyond the authority the articles give an officer, cannot claim he did not know.
• He is deemed to know the restrictions on the directors' powers, the persons whose signatures are required, and the matters reserved to the general meeting.

The rule can be harsh. In Kotla Venkataswamy v. Chinta Ramamurthy (Madras High Court, 1934) the articles required deeds to be signed by the managing director, the secretary and a working director. A mortgage deed was signed by the secretary and a working director only. The mortgagee could not enforce it: he was deemed to know the articles, and the deed on its face did not comply.

The rule is a negative one. It operates against the outsider who relies on something inconsistent with the public documents; it does not entitle the company to rely on what the public documents do not say. It also extends only to documents registered and open to inspection, not to internal resolutions that are not public.

2. The rule in Turquand

Royal British Bank v. Turquand (1856). The deed of settlement (the equivalent of articles) of a joint stock company allowed the directors to borrow on bonds such sums as might from time to time be authorised by a resolution of the company in general meeting. The directors issued a bond to the bank without any such resolution having been passed. The company denied liability. It was held liable. The bank was deemed to know that the directors could borrow only with a resolution, but it was not deemed to know whether the resolution had been passed; that was a matter of internal management. Jervis C.J. said that a party dealing with the company, having read the deed and found that the directors could borrow if authorised by resolution, was entitled to infer that the authority had been given.

The rule. Persons dealing with a company in good faith are entitled to assume that all matters of internal procedure required by the articles have been duly complied with. They need not inquire into the regularity of the internal proceedings. Two reasons support it: the outsider has no means of knowing the company's internal affairs, and commerce would be impossible if every lender had to audit the company's minute books.

The rule was applied in Mahony v. East Holyford Mining Co. (House of Lords, 1875), where a bank honoured cheques signed by persons who had acted as directors and secretary though never properly appointed, and the company was bound. Its statutory reflection is section 176 of the 2013 Act: no act done by a person as a director is invalid by reason of a defect or disqualification in his appointment, or its termination, discovered later; but the section does not validate acts done after the company has noticed the defect.

3. Exceptions to the rule

• Knowledge of the irregularity. A person who actually knows, or is put on notice, that the internal procedure was not followed cannot rely on the rule. Howard v. Patent Ivory Manufacturing Co. (1888): directors could borrow beyond 1,000 pounds only with the consent of the general meeting; debentures for a larger sum were taken by the directors themselves, who knew no consent had been given, and were valid only up to 1,000 pounds.
• Insiders. Directors and officers who are themselves responsible for the internal procedure cannot plead ignorance of it: Morris v. Kanssen (House of Lords, 1946), where a director who had taken part in an irregular allotment could not rely on the rule.
• Suspicion and negligence. Where the circumstances are suspicious and invite inquiry, the outsider must inquire. In Anand Bihari Lal v. Dinshaw & Co. (Oudh, 1942) a person accepted a transfer of the company's property from its accountant; since such a transaction was obviously beyond an accountant's ordinary authority, he should have inquired, and the transfer was void. In Underwood (A.L.) Ltd. v. Bank of Liverpool (1924) a director paid company cheques into his personal account; the bank should have been put on inquiry.
• Forgery. The rule validates irregular acts, not forged ones. In Ruben v. Great Fingall Consolidated (House of Lords, 1906) the secretary forged the signatures of two directors on a share certificate. The company was not bound: a forgery is a nullity, not an irregularity in internal management.
• No reliance on the articles. The outsider must have relied on the apparent authority. Where he never read the articles and did not know of the power that might have been delegated, he cannot claim that he assumed a delegation had been made: Rama Corporation v. Proved Tin and General Investments (1952).
• Acts that are void or ultra vires. The rule presumes regularity in internal procedure; it cannot validate an act beyond the company's objects, which no internal procedure could have authorised.

4. Problem

The articles of XYZ Ltd. authorise the directors to borrow up to one crore rupees, and beyond that only with a special resolution of the members. The directors borrow two crore rupees from a bank, telling the manager that the members have passed the resolution. No resolution was passed. The company refuses to repay the excess. Advise the bank.

Issue. Whether the bank can enforce the loan above the directors' own limit when the internal authorisation was never given.

Law. The bank is deemed to know the articles (constructive notice), and so knows a resolution was needed. But under Turquand it may assume that internal requirements were complied with unless it knew of the irregularity, was put on inquiry, or was an insider. Separately, section 180(1)(c) requires a special resolution for borrowings exceeding paid-up capital, free reserves and securities premium, and section 180(5) provides that a debt incurred beyond that limit is not valid unless the lender proves he advanced the loan in good faith and without knowledge that the limit had been exceeded.

Application. The bank read nothing inconsistent with the borrowing; it was told the resolution had been passed and had no reason to doubt it. It is an outsider, and nothing on the facts suggests suspicion. The company may argue that a special resolution must be filed with the Registrar under section 117, so that the bank could have searched the register and is fixed with notice of its absence. The answer is section 180(5) itself: where the statutory limit is crossed, Parliament has made the lender's good faith and want of knowledge the test, not whether he searched. Whether the excess is within or beyond the section 180 limit, the bank succeeds if it acted in good faith.

Conclusion. The bank can recover the whole loan, relying on Turquand and on the good faith protection in section 180(5). The directors who misrepresented their authority are also liable to the company for breach of duty.

How this is examined

January 2026 asked “Discuss the rule laid down in Royal British Bank v. Turquand along with exceptions” for 10 marks; June 2025 set a short note on “doctrine of constructive notice”. For the essay: constructive notice first in a short paragraph, then the facts and rule of Turquand, its rationale, section 176, and the exceptions with cases. For the short note on constructive notice: meaning, basis in the public character of registered documents, Kotla Venkataswamy, and the limit that indoor management places on it.