Law and You > Corporate Laws > Companies Act, 2013 > The Doctrine of Constructive Notice
The memorandum of association and articles of association are the two most important documents needed for registration and incorporation of a company. The memorandum of association of a company contains the fundamental conditions upon which alone the company has been incorporated. Both Memorandum and Articles of Association are considered to be public documents. They are available for public inspection in the Registrar Office. Section 399 of the Companies Act, 2013 allows any person to electronically inspect, make a record, or get a copy/extract of any document of any company which the Registrar maintains. There is a fee applicable for the same. The documents include the certificate of incorporation, Memorandum, and Articles of the company. It thereby becomes imperative that any person who transacts any business with the company is conversant with all the rules and regulations of the company which are available in the public domain. However, even if a person fails to read them, the law assumes that he is aware of the contents of the documents and understood them. This apparent presumption is called the Doctrine of Constructive Notice. A person dealing with the company in a way contrary to provisions of the Memorandum- or Articles will have to bear the consequences of the lapse. A common example of Constructive Notice is when a court is unable to directly reach someone and publishes a summons in the public newspaper and it is assumed that everybody has read it.
In Griffith V. Paget (no.2) (1877) 6 Ch. D. 517 case, the Court held that it is presumed that individuals dealing with the company have not only read these documents but that they have also understood their proper meaning.
In Oakbank Oil Co. v. Crum, 1882 8 AC 65 case, the Court held that anyone who is dealing with the company shall be presumed to have read and understood the MOA and AOA of the company, thus presumes to be a notice to the public.
In Mahony v. East Holyford Mining Co. (1875) 6 H.L.C. case, the Court observed that “Every joint-stock company has its memorandum and articles of association… open to all who are minded to have any dealings whatsoever with the company, and those who so deal with them must be affected with notice of all that ‘is contained in these documents.”
If a person enters into a contract that is beyond the powers of the company, he cannot acquire any rights under the contract against the company. For example: if the articles provide that a bill of exchange must be signed by two directors. A person dealing with the company must see that this is done. If he has a bill signed by only one director, he cannot claim under it.
In Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653 case, the company, and M/s. Riche entered into a contract where the company agreed to finance the construction of a railway line. Later on, directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company. Riche filed a suit demanding damages from the company. According to Riche, the words “general contracts” in the objects clause of the company meant any kind of contract. Thus, according to Riche, the company had all the powers and authority to enter and perform such kind of contracts. Later, the majority of the shareholders of the company ratified the contract. However, directors of the company still refused to perform the contract as according to them the act was ultra-vires and the shareholders of the company cannot ratify any ultra-vires act. The House of Lords held that the contract was ultra-vires the memorandum of the company, and, thus, null and void. They also stated that even if every shareholder of the company would have ratified this act, then also it had been null and void as it was ultra-vires the memorandum of the company. Memorandum of the company cannot be amended retrospectively, and any ultra-vires act cannot be ratified.
In Kotla Venkaswami v. Ram Kurthi, AIR (1934) Mad. 579 case, all deeds, etc., were to be signed by the managing director, the secretary, and a working director as per articles of the company. R accepted a deed from the company which was signed by a secretary and a working director on behalf of the company. It was held that R could not have accepted such a deed as it was not signed by the required persons and hence was invalid. The Court observed: “If the plaintiff had consulted the articles, she would have discovered that a deed such as she took required execution by three specific officers of the company and she would have refrained from accepting a deed inadequately signed. Notwithstanding, therefore she may have acted in good faith and her money may have been applied to the purpose of the company, the bond is nevertheless invalid.”
In Re Jon Beauforte (London) Ltd case, (1953) 1 Ch 131 case, an insolvent company’s objects were to manufacture dresses but the company was manufacturing veneered panels. The knowledge of this development was with the creditors. Therefore, in the insolvency proceedings, their claim was not carried out for being ultra vires for the company and a constructive notice to the creditors.
In Ernest v. Nicholls, (1857) 6 HL Cas 401 case,where it was held for the first time that any person who is dealing with the company is deemed to be familiar with the contents of all the public documents of the company.
Criticism to the Doctrine of Constructive Notice:
The rule of constructive notice has proved too inconvenient for business transaction, particularly where the directors or other officers of the company were empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders. The investors, vendors, creditors and other outsiders have no available mechanism to check whether those sanctions and approvals had actually been obtained. Due to the business necessities they do not dare to ask for such approved resolutions from the directors of the company. Hence the strict application of the doctrine of constructive notice is criticised.
Conclusion:
The doctrine of constructive notice under the Companies Act, 2013, is a long-established principle that plays a significant role in company law. It holds that any person dealing with a company is presumed to have knowledge of its public documents, particularly the Memorandum of Association (MoA) and Articles of Association (AoA), as these are filed with the Registrar of Companies and are publicly accessible. The doctrine assumes that since these documents are available for public inspection, any outsider entering into a contract with the company is expected to read and understand their contents.
This principle is meant to protect companies from claims by outsiders who may rely on unauthorized or ultra vires acts by company officers. If an act is beyond the scope of what is authorized in the MoA or AoA, a third party cannot enforce the contract by claiming ignorance of the company’s internal rules. The doctrine, therefore, places a duty of due diligence on anyone dealing with the company.
However, the doctrine has its limitations, especially when considered alongside the doctrine of indoor management, which provides some protection to outsiders acting in good faith. While constructive notice prevents individuals from claiming ignorance of public documents, the doctrine of indoor management allows outsiders to assume that internal company procedures have been properly followed.
In conclusion, the doctrine of constructive notice under the Companies Act, 2013, serves as an important tool for corporate governance and legal accountability. It reinforces the need for transparency and due diligence when engaging with corporate entities. Nevertheless, its strict application can sometimes be harsh, especially on innocent third parties, which is why it is balanced by the doctrine of indoor management. Together, these doctrines provide a fair and comprehensive legal framework for regulating the relationships between companies and external parties.