This article has been written by Yashika Patel. In this article, the author provides an exhaustive analysis of the doctrine of constructive notice. Further, the article also gives an overview of the effects and exceptions to the doctrine. Furthermore, the evolution of the doctrine, as shaped by judicial precedents, has also been elaborated in this article.
It has been published by Rachit Garg.
Table of Contents
Introduction
Businesses and companies function within the framework of guidelines, protocols, and regulations to guard agency’s management from outside elements and minimise their legal liabilities. These measures ensure that everyone is aware of the company’s regulations, guidelines, and operations. The concept of constructive notice is crucial, as it establishes the need to take measures to shield the company from potential harm caused by third parties.
The doctrine has developed over time through judicial interpretations. According to this doctrine, individuals who engage with or intend to enter into an agreement with the enterprise are responsible for inspecting and being aware of some public documents. These public documents include documents such as the Memorandum of Association (MOA) and Articles of Association (AOA). Constructive notice refers to an indirect form of notification that is generally communicated in a manner which assumes that individuals have received it.
What is constructive notice
Constructive notice is a legal term which means that someone is informed of the case that could affect their interest whether or not they truly received it, i.e., if certain procedures established by the law have been followed, it would be deemed that the person has received the notice, even if in fact they did not. Whart defines constructive notice as “the knowledge which law implies the party to have had, whether he actually had it or not.”
A notice is defined as a formal communication with the intent to inform a person about important facts and records, thereby enabling them to take suitable actions on that behalf.
Notices are of two types-
Actual
The actual notice, as the name suggests, is the information and records which are provided in the ‘written form’. They are, preferably, written with the help of paper and ink. These kinds of notices are sent to individuals or institutions to get them to know about the enclosed information.
Constructive or deemed
Constructive notices or deemed notices do not exist physically. These kinds of notices are generally meant to be comprehended in order to convey a particular fact.
The Doctrine of constructive notice falls under the second category, i.e. constructive or deemed. It serves as an official notification of unique data concerning the MOA and AOA.
This Doctrine is formed on the principle of presumption of knowledge and holds utmost importance within the domain of laws relating to companies. Every enterprise is obliged to formally register their company’s MOA and AOA with the registrar under Section 7(1)(a) of the Companies Act, 2013 who acts as a public office.
MOA and AOA are the documents that outline the goals and authority of a company and upon registration, these files become accessible to the general public and are assumed to be ‘Public documents’ under Section 399 of the Companies Act, 2013. These Public documents are available for everyone to read either for free or for a nominal fee. Outsiders who wish to enter into a contract with the company can read essential information about the company such as its capabilities and shares through these documents. In Oakbank Oil Co. v. Crum, it was established that anyone dealing with a company is expected to have gone through these documents and have comprehended them entirely.
Section 17 of the Companies Act read with Rule 34 of the Company (Incorporation) Rules, 2014 provides that a company shall on payment of a prescribed fee send a copy of MOA or AOA to the member within seven days of the request. It can be said that the company is obligated to provide copies of these registers and reports to its shareholders, within a fixed period of time. However, if the company provides false information in its documents, it would be subjected to penalties as mentioned under Section 448 of the Act.
It is presumed that anyone willing to or engaging with the company has very well examined and comprehended these files. This process of being aware of the documents is generally referred to as the doctrine of constructive notice.
If an individual engages with a business enterprise in violation of the company’s MOA or AOA or partakes in a transaction exceeding the business enterprise’s authorised scope and power, they may no longer be given any legal protection and be held completely responsible for the resulting consequences.
This doctrine serves as a preventive measure rather than an affirmative doctrine, as it provides a safeguard to the company from the outsider person and vice versa. It helps in the prevention of unfair and wrongful trade practices. The main aim of the doctrine is to disallow claims of any individual that he was unaware of the company’s regulations, in case he files a suit against the company. Consequently, it would become the duty of the contracting party to thoroughly go through the files and recognise their implications.
Connection of doctrine of constructive notice with the company
Whenever a person is dealing with a company, it is presumed that he has all the required information about the company and has gone through all the public documents such as AOA and MOA. Anybody dealing with the company is required to have this information in order to better understand the limitations and drawbacks of the company and to what extent the directions of the company can contract.
In a suit of liability against the company, it will be considered the fault of the contracting party for not going through the MOA and AOA, and they cannot blame the company for not providing the information.
MOA i.e., Memorandum of Association is defined under Section 2(56) of the Companies Act, 2013. MOA contains the object for which the company is formed. It also defines the scope of the company’s operations and its boundaries. It provides details regarding the powers and rights of the company. The contents of MOA include-
- Name clause
- Liability clause
- Registered Office clause
- Object clause
- Capital clause
- Association clause
AOA i.e., Articles of Association is defined under Section 2(5) and Section 5 of the Companies Act, 2013. It is a legal document with the purpose of outlining the rules and regulations governing the operations of the company. It defines the procedures and rules for a company’s shareholders, as well as the company’s relationship with them. The Article of Association also defines the procedure for dispute redressal in case of a dispute between the company and the shareholders and between shareholders themselves.
Relevant provisions under the Companies Act, 2013
The realm of commercial enterprise necessitates safeguarding the interests of all concerned parties. While this doctrine initially appears to be favouring individuals contracting with enterprises, its paramount goal is to foster funding in business endeavours, thereby sustaining the overall financial system.
Section 399 of the Companies Act, 2013 deals with inspection, production, and evidence of the files sustained by the Registrar of Companies (RoC). This Section outlines the provisions regarding the protection of enterprise records by using the RoC.
Inspection of documents
Section 399 of the Companies Act, 2013 permits people to look at the files retained by RoC during regular working hours. These documents may include the AOA, MOA, annual returns, financial statements, etc.
Production
RoC has the responsibility to send a notice to any person responsible for the possession or management of any report that ought to be submitted to the Registrar. This notice may be submitted to produce such files within a targeted time.
Evidence
The documents or the licensed copies issued via RoC hold admissibility as proof in legal proceedings, thereby confirming their validity and usability in court proceedings.
While the Companies Act allows the general public to inspect AOA and MOA, some files and information can be prohibited from public view. This confined material can also encompass sensitive information pertaining to a corporation’s secrets and techniques, intellectual property, or personal information, which are safeguards against public disclosure. Moreover, the Registrar of Companies has the authority to impose appropriate restrictions on document inspection so as to keep confidentiality and guard other legitimate pursuits.
It’s vital to be aware that the approaches and pointers for examining, generating and imparting evidence of documents can vary according to the rules mounted by the Registrar of Companies and authorities responsible for overseeing corporate affairs.
Effects of the doctrine of constructive notice
- The doctrine makes external parties aware of the information contained in publicly available documents. Consequently, when a document is submitted and is officially recorded by the appropriate bodies, it is presumed that the document has been read and acknowledged by the parties in the contract.
- The principle establishes that registered documents carry legal importance for all the parties involved. It supposes that parties must have possessed knowledge concerning the information present in the registered documents.
Death of the doctrine of constructive notice
The doctrine of Constructive notice is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents.
In many instances, this doctrine has been extended to cases outside its jurisdiction. The effect of constructive notice can be harsh on an outsider who is contracting with the company because he is supposed to have all the information provided in the public documents. In case of any default, he cannot even claim relief on the grounds that he was unaware of some information provided in these documents.
As a result, many countries like the UK have abrogated this doctrine in the UK Companies Act, 1985. UK Court stated that before this enactment came into force, any person dealing with the company needed to look at the memorandum and articles of the company to satisfy himself that the transaction was within the corporate capacity, but the new sub-section i.e Section 9(1) of the Act states that the good faith has to be assumed and the outsider dealing with the company need not inquire.
There is a decrease in reliance on the doctrine of constructive notice, or it can be said that various abovementioned problems have led to the ‘death of the doctrine’. Although the principle of constructive notice shields the corporation from outsiders, it has proven to be extremely cumbersome for commercial transactions. Many times the information provided in the Public documents is ambiguous and susceptible to a company policy. When the doctrine is applied in such situations, it results in unfair treatment of outsiders. Thus, an exception, the ‘Doctrine of Indoor management is established and the reliance is now mostly put in the Doctrine of Indoor Management, which seeks to protect outsiders against the company and is, therefore, more convenient for outsiders contracting with the company.
Exceptions to the doctrine of constructive notice
The principle of indoor management serves as an exception to the doctrine of constructive notice. The doctrine of Indoor management restricts external parties from having access to information or awareness of a company’s internal affairs. Consequently, if a particular action is sanctioned by the company’s MOA or AOA, external parties may reasonably assume that all necessary formalities have been diligently followed while executing that action. This legal principle, commonly referred to as the Doctrine of Indoor Management or the Turquand Rule originated from a significant case of Royal British Bank v. Turquand (1856).
The principle of Indoor management means that a company is responsible for its own internal affairs. This rule is essential for individuals who are working with a company through its directors or other personnel. It provides them with the assurance that the company’s members are performing their duties within the boundaries of their explicit authority. Consequently, when a legitimate action, as defined in the company’s AOA, is executed in a specific manner, external parties collaborating with the company can reasonably infer that the directors and other officers have acted within their authorised capacity.
Difference between the doctrine of constructive notice and the doctrine of indoor management
| Serial No. | Basis of Difference | Doctrine of Constructive Notice | Doctrine of Indoor Management |
| Definition | It acts as a safeguard for the company against third parties contracting with it. | It acts as a safeguard for the outsiders dealing with the company. | |
| Scope | It is limited to the external functioning and affairs of the company. | It is limited to the internal functioning and affairs of the company. | |
| Application | The company’s AOA and MOA are considered and are available for the public to read. It is crucial to get it registered with the registrar of the company, and they are made accessible to the general public. | Documentation of the internal affairs of the company is not mandatory. It is not accessible to the general public or outsiders. | |
| Eligibility | According to this doctrine, to be eligible for protection under this doctrine, the third party must be fully aware of the AOA and MOA of the company. It does not protect parties who are unaware of these documents due to their carelessness. | The parties that are unaware of the internal affairs of the company shall also be protected, as they are not permitted to inquire into the company’s private business in the first place. | |
| Purpose | It acts as a protective measure against outsiders, for the benefit of the company. | It acts as an exception to the Doctrine of Constructive Notice and lessens its impact. |
Important cases
DehraDun Mussorie Electric Tramway Co. Ltd. v. Jagmandar Das (1931)
In this case, according to the corporation’s established regulations, the board of directors had the power under AOA to borrow money for the purposes of the company and to secure a loan by mortgage. However, they were expressly prohibited from delegating their power to borrow money. The managing agents disregarded this restriction and obtained an overdraft, i.e. they withdrew more cash than available with the company in order to pay for the machinery urgently required.
The issue before the court was whether the agents had the authority to borrow money on behalf of the company. The respondent contended that the power of entering into a contract would include the power of contracting loans, but this contention was not accepted, as the company restricted the Board from delegating its power of borrowing money. However, the loan was urgently required, and an agent has, under the Contract Act, extensive powers in case of an emergency, to do acts necessary for protecting the business. The Supreme Court ruled in favour of this action and considered it legally binding, stating that such temporary loans should be considered separate from applicable provisions and regulations.
Kotla Venkataswamy v. Chinta Ramamurthy And Ors. (1934)
In this case, the enterprise’s AOA stipulated a demand that every important legal document ought to undergo the signatures of the managing director, secretary, and director involved in the company’s work. In accordance with this provision, the company secretary and a working director signed a mortgage deed, officially moving ownership to the plaintiff. Subsequently, the corporation voluntarily initiated liquidation lawsuits and proceeded to promote the mortgaged assets to the defendant. Eventually, the company approached the court for legal recourse.
The Madras High Court denied the validity of the sale of the property under mortgage, basing its decision on the fact that the organisation’s AOA explicitly required the presence of three officer’s signs, which was well-known information. However, because of the plaintiff’s failure to exercise due care and negligence in not reading the documents, the Doctrine of constructive notice came into play, deeming the mortgage deed incomplete.
Rama Corporation v. Proved Tin and General Investment Co. (1952)
In this particular case, the director of the company entered into an agreement with Rama Corporation, acting on behalf of the company, and in the process took a check from this corporation. However, the director was not authorised to do so and the articles of the company did not provide the director with any power to make such a contract for the company. The defendant repudiated the contract. The plaintiff company sued the defendant on account of breach of contract. It was held that a person who at the time of entering into a contract had no notice of the company’s article of association, later on, cannot rely on the remedy of the indoor management.
MRF Ltd. v. Manohar Parrikar (2010)
In this case, the Supreme Court analysed the doctrine of Indoor management in great detail. A notification was issued by the State government granting a 25% rebate in tariff. The legality of these notifications was challenged on the grounds that they were not issued in compliance with the Constitution and the business rules of the state as the decision was taken without seeking concurrence of the finance department and therefore could not be treated as the decision of the state government as a whole. The respondent tried to take the defence of the doctrine of indoor management.
The court held that the doctrine of indoor management is an exception to the doctrine of constructive notice which protects the insiders of a company. However, suspicion of irregularity has been recognized as an exception to this doctrine. It is not applicable where surroundings invite inquiry. Therefore, it cannot be applied in the present scenario as there are doubts with regard to the conduct of the minister in the issuance of notifications, i.e. there is a definite suspicion of irregularity rendering the doctrine of indoor management inapplicable to the present case.
Conclusion
The realm of business necessitates safeguarding the interests of all involved parties, as it is through thriving businesses that the economy and commerce can flourish. While this doctrine seemingly serves to protect individuals involved in transactions with a company. The primary objective of this doctrine lies in fostering investments in business, ensuring the continuous growth and stability of both the business sector and the overall economy.
The doctrine of constructive notice is a very important legal concept which has been developed over time with the help of various court judgements. It is often called an unreal doctrine, for it has been created through various judicial pronouncements. This doctrine makes it necessary for every outsider to have knowledge of all the legal documents for the company before dealing with it for the effective functioning of the business world.
Throughout the course of time, this doctrine has evolved to great lengths leading to the development of the doctrine of indoor management which implies that though an outside party has the means to examine the documents of the company, all the inner functioning remains the company’s private matter, and the outsider has no right to inquire if the company is functioning according to its MOA and AOA.
The doctrine of constructive notice is an important tool which fosters growth and development in the corporate world we live in. It stays a timeless guideline in a world driven by continuous development.
Frequently Asked Questions (FAQs)
What is the difference between the doctrine of constructive notice and the doctrine of indoor management?
The doctrine of Indoor management is an exception to the doctrine of constructive criticism. According to the doctrine of indoor management, all the internal functioning of the Company remains its private matter.
What is the need for the doctrine of constructive notice?
It removes the onus of liability from the company in case an external party dealing with the company denies having knowledge of the AOA and MOA of the company.
What is the limitation of the doctrine of constructive notice?
It does not provide protection to the company regarding internal matters.
Where did the doctrine of constructive notice come from?
The doctrine of constructive notice emerged from the case of Oakbank Oil Co. v. Crum (1881).
What is constructive notice under Transfer of Property Act?
Under Section 3 of the Transfer of Property Act, 1882, if the circumstances indicate that a reasonably prudent person ought to have known a particular fact related to the transaction of transfer, then he will be deemed to know it.
Who can invoke the doctrine of constructive notice?
Any outsider dealing with the company can invoke this doctrine.
References
- https://www.scconline.com/blog/post/2019/06/05/question-marks-on-efficacy-of-the-principle-of-constructive-notice/
- https://seajbel.com/wp-content/uploads/2018/01/LAW-72.pdf
- Company Law by Avtar Singh
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