DEHRADUN-MUSSOORIE ELECTRIC TRAMWAY CO. V. JAGMANDAR DAS AND OTHERS, AIR 1932 ALL 141.
FACTS
- This is a defendant's appeal arising out of a suit for sale upon the basis of a mortgage. The defendant is the Dehradun Mussoorie Electric Tramway Company, Limited (in liquidation). This company was incorporated about the end of August, 1921, having a registered office at Dehradun.
- The plaintiffs are the proprietors of a Bank at Dehradun and the company had an account with that Bank.
- On the 19th of January, 1923, the plaintiffs allowed the company, at the request of their managing agent Mr. Beltie Shah Gilani, an overdraft of Rs. 25,000. The mortgage deed in suit was executed on the 19th of June, 1923, by Mr. Bertie Shah on behalf of the company in favour of the plaintiffs to secure the overdraft. The defendants admit receipt of the consideration by the company.
- The defendants have no objection to treating the plaintiffs as unsecured creditors, but plead that the company is not bound by the mortgage deed. The trial court held that the mortgage was valid and binding upon the company and decreed the plaintiffs' suit.
- The articles of the company provided that the directors could delegate all the powers except the power to borrow but the managing agents took the overdraft (that is cash is less but withdrawal is more) without the approval of the board was held binding the court saying that such temporary loans must be kept outside the purview of the relevant provisions.
ISSUE
- Whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the plaintiffs on behalf of the company?
- Whether the mortgage deed was executed in such a manner as to bind the company under the provisions of Company law?
HELD
The Court rejected the doctrine of constructive liability and the Company was held liable to the party to the transaction. The Doctrine of Indoor management was therefore created as an exception to the Doctrine of constructive Notice so as to counter its effect and protect the third party against any arbitrary action of the company and prevents the latter from evading their liability.
- The court held that even if Mr. Beltie Shah exceeded his powers in obtaining the loan to meet an emergency his action was never repudiated, but on the contrary was clearly ratified by the Board of Directors; so we hold that the company cannot escape liability on the ground that their managing agent had no authority to raise the loan.
- The mortgage deed was signed by Mr. Beltie Shah in his capacity as managing agent of the company and it bears the common seal of the company.
- No rule of law applicable to companies in general, or to this company in particular, has been shown to us requiring a deed of mortgage to be executed on behalf of a company by affixation of the common seal. If a document under seal is not necessary, then a mere defect in the manner of affixing the seal will not render the document invalid.
- The appeal was allowed and varied the decree of the trial court by granting to the plaintiffs a simple money decree for Rs. 29,773-4-3 to be realised by them in due course of liquidation.
- The appellants will get half the costs of this appeal and those in the court below from the respondents. The respondents will bear their own costs.
COMMENTARY
“Constructive notice is more or less an unreal doctrine. It does not take notice of the realities of business life…The courts in India also do not seem to have taken the rule of constructive notice seriously. For example, in DehraDun Mussoorie Electric Tramway Co Ltd v Jagmandar Das, the articles of a company expressly provided that the directors could delegate all their powers except the power to borrow. Even so an overdraft taken by the managing agents without approval of the Board was held to be binding, the court saying that such temporary loans must be kept outside the purview of the relevant provision. Similarly, the Calcutta High Court enforced a security which was not signed in accordance with the company's articles. The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The latter seeks to protect the company against the outsider, the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the company's internal machinery is handled by its officers. If the contract is consistent with the public documents, the person contracting will not be prejudiced by irregularities that may beset the indoor working of the company.”