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:
It can be seen that the rule of constructive notice has drastic impacts on the corporate world and mainly investors. The courts are bound to apply the doctrine even if that equals to injustice for the persons involved. There are no means to ascertain whether necessary sanctions and approvals have been obtained before a certain officer exercises his powers which, as per articles, can only be exercised subject to certain approvals. Therefore, to mitigate such a situation, those dealing with the company can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as the ‘doctrine of indoor management’ also known as Turquand’s Rule. It was first laid down in the case of Royal British Bank v. Turquand. It has been held to be an exception to the rule of constructive liability and is discussed in the next article.