Doctrine of Constructive Notice.pptjjnnjx

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1. Doctrine of Constructive Notice

2. Introduction The company on incorporation is recognized as a separate and distinct legal entity from its members and can after incorporation have in its own name business and hold assets and liabilities. The company being a legal person is governed by its constitution and framework which lay down its objectives, nature business, powers and how it will function. The set of these documents are called memorandum of association (the memorandum) and articles of association (the articles). The memorandum and articles of every company are required to be registered with the Registrar of Companies (the Registrar) under the Companies Act, 2013 (the Act). After incorporation, all the amendments in the memorandum and articles as approved by the members of the company are also required to registered with the Registrar.

3. As per Section 399 of the Companies Act, 2013 any person can inspect electronically, make a record or get a copy of any document filed by the company with the Registrar, on payment of the fees prescribed. The documents include the memorandum and articles of any company. The office of the Registrar is public office and therefore the memorandum and articles and the amendments therein filed with the Registrar are public documents and available of inspection and if desired copies of the same can also be obtained

4. It is the duty of every person dealing with the company to inspect the public documents i.e. memorandum and articles and the amendments therein and to make sure that his entering into the dealings with the company conform with the provisions of the memorandum and articles of the company. Even if a person fails to read them, the law assumes that he is aware of the content of and provisions made in the documents . Such implied or presumed notice is called the doctrine of ‘constructive notice’ of the memorandum and articles of the company. Another effect of this is that a person dealing with the company is taken not only to have read the memorandum and articles but also to have understood them according to their propose meaning also. The person who is dealing with the company is presumed to have understood the objects for which the company is incorporated and of the powers and obligations of the directors etc. of the company

5. The memorandum and articles, when registered, become public documents and can be inspected by anyone on payment of nominal fee. Therefore, every person who contemplates entering into a contract with a company has the means of ascertaining and is consequently presumed to know, not only the exact powers of the company but also the extent to which these powers have been delegated to the directors, and of any limitations placed upon the exercise of these powers. In other words, every person dealing with the company is deemed to have a “constructive notice” of the contents of its memorandum and articles.

6. In fact, he is regarded not only as having read those documents but also as having understood them according to their proper meaning [Griffith v. Paget, (1877) Ch. D. 517]. Consequently, if a person enters into a contract which is beyond the powers of the company, as defined in the memorandum, or outside the limits set on the authority of the directors, he cannot, as a general rule, acquire any rights under the contract against the company [ Mohony v. East Holyfrod Mining Co., (1875) L.R. 7 H.L. 869]. For example, if the articles provide that a bill of exchange to be effective must be signed by two directors, a person dealing with the company must see that it is so signed; otherwise he cannot claim under it.

7. The articles required that all documents should be signed by the managing director, secretary and the working director on behalf of the company. A deed of mortgage was executed by the secretary and the working director only and the Court held that no claim would lie under such a deed. The Court said that the mortgagee should have consulted the articles before the deed was executed. Therefore, even though the mortgagee may have acted in good faith and the money borrowed applied for the purpose of the company, the mortgage was nevertheless invalid [ Kotla Venkataswamy v. Rammurthy , AIR 1934 Mad 579]. The doctrine of indoor management protects third parties who are entitled to an assurance that all the procedural aspects of a transaction are carried out.

8. Outsiders dealing with incorporated bodies are bound to take notice of limits imposed on the corporation by the memorandum or other documents of the constitution. Nevertheless, they are entitled to assume that the directors or other persons exercising authority on behalf of the company are doing so under the internal regulations as set out in the Memorandum & Articles of Association.

9. The impact of this doctrine on practical relations is thus stated in HALSBURY: “A company is subject to the rule that, where the conduct of a party charged with a notice shows that he had suspicions of a state of facts the knowledge of which would affect his legal rights, but that he deliberately refrained from making inquiries, he will be treated as having had notice, though he is not entitled to claim for his own advantage,” [Jones v. Smith, (1841) 1 Hare 43].

10. Royal British Bank v turquand (1856)