Introduction
When we study Company Law, one of the most important principles that come our way is the doctrine of Constructive Notice. The doctrine of Constructive Notice implies that the Article of Association is notable by an outsider who seeks to hold any relation with the company in the near future because the Article of Association of the Company is a public document and is available to each and everyone as per Section 399[1] of the Companies Act, 2013. From the time when the company is registered then the Article of Association and the Memorandum of Association is considered as the ‘public document’ and they are open for inspection by anyone from the general public.
Hence it is presumed that any person who is dealing with the company is well equipped by its rules and regulations. The rule of constructive notice extends not only to Memorandum and Articles but also to all the other documents which are required to be registered with the Registrar of Companies. But the doctrine of constructive notice does not apply only to documents that are filed with the Registrar of Companies for the record.
Effect of the Doctrine of Constructive Notice
The effect of the doctrine of constructive liability is harsh on the other side of the party. Therefore, it is the duty of every person working with the company to inspect their public documents and make sure that their contract is in conformity with their provisions. Under the doctrine of Constructive Notice, it is the outsider and it is troubled with a duty to know the documents that guide the company.
He should be well aware of all the legal documents before he signs any agreement with the company. It is also the responsibility of the third party to understand the true meaning of the provision and the terms therein and this doctrine favours corporate bodies. However, the court later also developed a doctrine subsequently and held that although the third party should have notice of all the contents of the Memorandum and Article, they are not required to inspect the internal matters and to see whether the company had complied with all the internal procedure.
The Madras High Court discussed the scope of the rule of constructive liability in the case of Kotla Venkataswamy vs. Rammurthy[2]. The dispute, in this case, was whether the mortgage bonds were validly executed according to the company’s articles of association so as to make the company liable. Article 15, of the Company’s Articles of Association provides that all deeds, hundies, cheques, certificates and other instruments hall be signed by the Managing director, the Secretary and the working Director acting on behalf of the Company, and shall be considered valid.
In the instant case, the plaintiff accepted a deed of mortgage executed only by the secretary and an executive director. The court held that the plaintiff cannot claim under this deed. The Court further observed that if the plaintiff had consulted the articles, they would have discovered that a deed to carry out the work required by the three specified officers of the company such as they would have refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may have acted in good faith and her money has been applied to the purposes of the company, yet the bond is invalid.
In the case of Re Jon Beauforte (London) Ltd[3], where the bankrupt company’s stated objects were to manufacture the dresses but it had for some time instead been making closed panels, a combination of actual knowledge of the business being carried on by the company and of constructive notice of its stated objects resulted in one of the claims of all creditors being ultra vires. The court stated that the result of this rule of constructive notice was that where the business being carried out by the company was known to the third party and whether he actually knew it or not, were ultra vires and he would be unable to sue the company.
In the case of the company’s ultra vires acts, the other party cannot claim relief on the ground that they were unaware of the company’s powers. The rules of common law established over the years have already provided comprehensive protection for persons dealing with a company in good faith where the act or transaction concerning or involving such persons is not ultra vires and beyond the powers of the company.
An exception to the Doctrine of Constructive Notice
The doctrine of indoor management is an exception to the doctrine of constructive notice and It is important to note that the doctrine of constructive notice does not allow outsiders to have report or notice of the internal affairs of the company. Therefore, if an act is authorized by a Memorandum or Articles of Association, then the outsider can assume that all detailed formalities are observed in carrying out the act and this is known as the Doctrine of Indoor Management or the Turquand Rule. This is based on a landmark case between The Royal British Bank vs Turquand[4].
In simple terms, the doctrine of indoor management means that the company’s indoor affairs are the company’s problem. Therefore, this rule of indoor management is important for those people who are working with a company through its directors or other persons. They can assume that the members of the company are performing their acts or functions within the scope of their explicit authority. Hence, if an act which is valid under the Articles is done in a particular way, then the outsiders working with the company can assume that the director or other officers have worked under their authority.
- Forgery: – If the company commits fraud anywhere in its Articles of Association or Memorandum of Association, the outsider will not be bound by the principle of constructive notice.
- Prior knowledge of the irregularity: – If the outsider has any prior knowledge of the irregularity but continues to contract with the company in order to attain some beneficial purpose then the doctrine of constructive notice will not apply.
- Negligence: – If the outsider is negligent, then the doctrine of Constructive notice does not apply.
Conclusion
The doctrine of Constructive notice is often quoted as an unreal doctrine and the reason behind this is that the doctrine is created by the courts through judicial pronouncements and it is an imaginary doctrine. The outsider and the company have several contracts a day. The doctrine lays a duty on each and every outsider to have a notice of all the legal documents of the company and this is done for the smooth and effective functioning of the corporate world.
The rule of constructive liability is an unrealistic doctrine and this doctrine requires each and every outsider not only to know the company’s documents but also presume to understand the exact nature of documents, which is practically not possible. And In reality, the company is not known by the documents but by the people who represent it and deal with an outsider.
The outsiders do the business and enter into contracts not always on the basis of company documents but on the goodwill and the reputation of the directors or officers who are representing the company. This is the reason why the courts have developed the doctrine of indoor management as an opposite to the doctrine of constructive notice in order to protect the interests of the outsiders.
[1] Companies Act,2013
[2] AIR 1934 Mad 579.
[3] [1953] 1 CH. 131
[4] (1856) 6 E&B 327
This Article is Authored by Kaushiki Ranjan, 4th Year BB.A LL.B(Hons.) Student at School of law, UPES, Dehradun.
