DOCTRINE OF CONSTRUCTIVE NOTICE

This article is written by Khizra Khan of 6^th semester of CSJMU, Kanpur, an intern under Legal Vidhiya

ABSTRACT

As we know that a company is a separate legal entity which is formed to carry out business to gain profit. Company’s formation and functioning have been governed by some laws, rules and regulations. The motive behind the enactment of these laws is to provide protection to company, it manages as well as the outsider person who is constitutionally engaging with the company. There are certain laws sets which provide protection to company from outsiders and vice versa. This article critically examines the company law’s doctrine of constructive notice. This piece is descriptive in approach and is based on the researches carried out to study the doctrine of constructive notice and also comprehend the relationship between the doctrine of constructive notice and doctrine of indoor management.

KEYWORDS

Company, Constitutionally, Laws, Rules, Regulations, Doctrine of Constructive Notice.

INTRODUCTION

The doctrine of constructive notice analyzes that because of the fact that a company is an artificial person without any body or soul, it is the duty of the outsiders who want to contract for any business with the company that they should go through the Memorandum and Articles of Association of the company. A company shall presume that anybody who has come to deal with the company must have the knowledge of these documents; as he is deemed to have gone through the Memorandum of Association of company and has understood them in same sense in which it has been written, is called Doctrine of constructive Notice. It prevents the outsiders from suing the company on ground that he did not know the Memorandum and Articles of company against the ultra vires act of company. Let’s start this piece by understanding the meaning of Constructive Notice.

MEANING OF CONSTRUCTIVE NOTICE

Constructive Notice states that when the person actually didn’t receive the notices but in the eyes of law, the notice is implied i.e., he/she is presumed to have received the notice. It is a legal term that shall have knowledge or should be known.

As we know that notices are of two types- Constructive Notice and Actual Notice. Numerous times confusion arises between both the two terms. Constructive notice signifies legal notice and an actual notice was never given. A person may not have actual notice nevertheless he may still have constructive notice. In actual notice we have the knowledge of the particular incident or any matter but in the constructive notice we have to presume that incident.

DOCTRINE OF CONSTRUCTIVE NOTICE

Every person who enters into any contract with a company, it will be presumed that the contents of the memorandum and articles of association. This is stated as the doctrine of constructive notice.

The memorandum and the articles of association of each company are registered with the Registrar of Companies. The Registrar’s office is a public office. Hence, the memorandum and articles of association become public documents. It is thereafter the duty of person dealing with a company to examine its public documents and make sure that the contract is in compliance with their provisions.

This doctrine operates against an outsider dealing with the company.

For example: If articles of company provided that a bill of exchange issued by it shall have the signatures of two directors, a person who has a bill signed by only one director cannot claim any payment of such bill because he is supposed to see that the bill is so signed.

Case Laws:

Kotla Venkataswamy v. China Ramamurthy (1)

• In this case, the articles of company provide that for mortgage of assets a mortgage deed needs to be signed by three officials i.e., MD, CS, and the Whole-time director.
• A mortgage deed was executed by petitioner for mortgage of assets but the deed contains only two signatures of CS and the Whole-time director.
• When mortgage money became due the company refused to pay mortgage money as mortgage deed was invalid.
• On petition, it held that the refusal to pay mortgage money on account of invalid mortgage deed is not wrong and applied this doctrine of constructive notice.

Rama Corporation v. Proved Tin and General Investment Co. (1952) (2)

• In this case it was held that the plaintiff company’s director formed an agreement with the defendant company’s director. It was stated that the agreement enables them to subscribe funds which they can use to finance the sale of goods supplied by the third party.
• The plaintiff company’s director gave a cheque to Defendant Company. But Defendant Company’s article of association mentions that only the director to whom the power of board had been delegated, is authorized to collect cheque on the behalf of company. The plaintiff was unaware of this condition as he hadn’t read the defendant’s articles.
• So, court applied the doctrine of constructive notice and the defendant company was not bound by the agreement. 

RELATION BETWEEN THE DOCTRINE OF CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT

Due to the criticisms faced by the doctrine of constructive notice, a new theory has been evolved by the courts known to the doctrine of indoor management. As the doctrine of constructive notice protects the company from outsiders; whereas the other is totally the opposite of the first one as it protects the outsiders from the company. The doctrine of indoor management is for the convenience for the business purpose. As the outsider is familiar with the constitution of the company; but not with what happening within the doors of the company that is closed for him.

Both the doctrines are crucially roles of judicious which facilitate business transactions between a company and an outsider. The doctrine of constructive notice has been made to protect the company in dealing with ordinary members of public, so that no outsider may claim that he was unaware of the company’s protocols mentioned in the memorandum or articles of association.

The doctrine of constructive notice is an exception or limitation to the doctrine of constructive notice.

ESSENTIAL FEATURES OF THE DOCTRINE OF CONSTRUCTIVE NOTICE

• Sometimes the constructive notice is known to be a legal fiction as it occurs when the courts believe that the interested parties have the knowledge that they don’t truly possess.
• Constructive notice is given superiority to actual notice
• A person must the knowledge of the company conditions whenever he/she enter into contract.
• This doctrine enables us to sue and to be sued.
• Constructive notice of ownership- recording the ownership document like memorandum of association, articles of association, minute meeting, employment agreement, company bye laws for operation etc., in public record.

THE DOCTRINE OF CONSTRUCTIVE NOTICE INTRODUCED IN COMPANIES ACT, 2013

In company law, it is stated that the doctrine of constructive notice is a theory in which all persons are involved in the business and it is considered that they are aware about the company’s articles of association and memorandum of association.

In the Section 399 of the Companies Act, 2013, which involves notion of constructive notice, it outlines the laws and regulations regulating inspection, proof of papers with the Registrar and production.

There is constructive notice not merely of the articles and memorandum of association, but also of the documents, such as special resolution mentioned in Section 117 which is required by the act to be registered with the Registrar.   

POSITION OF THE DOCTRINE OF CONSTRUCTIVE NOTICE IN INDIA

It was realized that the courts of India doesn’t tale this doctrine seriously. Taking the example of the case, Charnock Collieries Co. Ltd v. Bholanath, (3) the Calcutta High Courtstated that enforce a security which is not signed in compliance with the articles of company.

In the case of Dehradun Mussoorie Electric Tramway Co. Ltd v. Janmandae Das, (4) it was held that the articles of company for incorporation provide that the directors will transfer all rights to save the ability to borrow money. Although, the fact that managing agents obtained the overdraft without the board’s consent was declared binding by the court, in that it was stated these temporary loans must be maintained outside the scope of relevant rules.

In the case of Mufassil Bank case, (5) stated that so long as the delegation of power exists in the articles and also the agent’s act is not hit by the doctrine of ultra vires, under the contract in question the company is stopped from denying its obligations. This was carried forward in other cases too.  

CRITICISM OF THE DOCTRINE OF CONSTRUCTIVE NOTICE

Talking about the criticism of this doctrine, the biggest criticism is the doctrine of indoor management which has been introduced by the courts. This doctrine has proved to be too inconvenient for business transactions, as the directors or other employees of company were empowered under the articles, so that they can exercise certain powers which only subject to certain approvals or sanctions of the shareholders. The investors, vendors, creditors and other outsiders could not dare to ask the directors so many questions about the sanctions which have been obtained or to produce relevant resolutions as whether those sanctions and approvals cannot be ascertained in real situations. This doctrine is criticized for not being based on the realities of business life. It states that company is not known to general public through its articles and memorandum of association but is known through its officers.

Hence, the doctrine of constructive notice doesn’t safeguard the company as far as the internal proceedings of the company are engrossing.

CONCLUSION

In this article, I have scrutinized the Doctrine of Constructive Notice. Constructive Notice is frequently recognized as an unrealistic ideology as it is a fabricated concept which has been established by the courts through judicial pronouncements. This doctrine imposes obligation on every outsider to be familiar with the legal documents or the articles of the company. It is done to protect the company from any harm and for its smooth functioning.

So, it is necessary for a person to go through the memorandum and articles of company before entering into a contract with the company. It the contract is illegal or doesn’t adhere to with the rules governing the company, then it will be void and the decision given by the court in this case will in the favor of the company.

However, the approach of this doctrine is to radically support the company so that no third party can cause harm to the company. This rule blindly supports the company to a ceaseless extent.

REFERENCES

1. Kotla Venkataswamy v. China Ramamurthy. Mad. 579. 1934.
2. Rama Corporation v. Proved Tin co. 1952.
3. Charnock Collieries Co. Ltd v. Bholanath. ILR 39 Cal 810.5 1912.
4. Dehradun Mussoorie Electric Tramway v. Janmandae Das. ALL 141. 1932.
5. Mufassil Bank Case. All 206. 1925.
6. the doctrine of constructive notice, [Online] August 30, 2023. https://thelegalquotient.com.
7. Doctrine of Constructive Liability. [Online] December 30, 2020, https://lawbhoomi.com/doctrine-of-constructive-liability-and-doctrine-of-indoor-manangement-under-companies-act-2013.
8. Doctrine of Constructive Notice. [Online] August 06, 2019. https://www.lawteacher.net/free-law-essays/company-law/doctrine-of-constructive-notice.php.