THE DOCTRINE OF CONSTRUCTIVE NOTICE

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This article is written by Sowjanya. N of 6^th Semester of BA.LLB (Hons.) of University Law College and Department of studies in Law Bangalore University, an intern under Legal Vidhiya

Abstract

In law there is a maxim ‘ignorantia juris non-excusat,’ which translates to ‘ignorance of the law is no excuse,’ meaning of this maxim is that Court presumes that every party is aware of the law and hence cannot claim ignorance of the law as a defense to escape liability. A notice is provided to a person to make him aware of certain facts and notice need not always be direct and it can be given constructively also. Thus, the doctrine of constructive notice originated from these concepts which presume that all the persons dealing with the company are aware of the legal documents governing the company. article and memorandum of the company define the nature, structure, powers, and limitations of the company ignorance of these is not an excuse. This article aims to explain the meaning and importance of the doctrine of constructive notice.

Keywords: Notice, Presumption, Article of association, Memorandum of association, Registrar of companies.

Introduction

Constructive notice is when the person has not actually received the notices but in the eyes of law, he is presumed to have received the notice. In law, there are several things that we need not be saying but another person should be knowing it. In terms of corporate law, the doctrine of constructive notice refers to the presumption that everyone who interacts with the company is fully aware of its article of association and memorandum of association.

NOTICE

The term “notice” generally refers to conveying information or making someone aware of something. The main aim of the notice is to enlighten people about the facts and circumstances.

As it is generally understood, a notice is a kind of information that is conveyed to a person or group of people in a certain area. The notice can be given to the public at large or to a specific person.

Notice can be of two types actual notice and constructive notice.

When a person first learns about an incident or problem, they are said to have received actual notice. The person receives information personally. It is the notice given directly to the person concerned. Example: Notice issued to parties to a suit.

Constructive notice is when the person has not actually received the notices but in the eyes of law, he is presumed to have received the notice. It is assumed that information is shared and that others are aware of it. Usually sent when a lot of individuals need to be informed or when the addressee is unknown. Example: The notice or summon published in the newspaper.

DOCTRINE OF CONSTRUCTIVE NOTICE IN COMPANY LAW

The Doctrine of Constructive Notice is the legal concept of presumption of knowledge of a certain subject or information. According to company law, the AOA and MOA of the firm are deemed to be public records, and everyone doing business with the company is assumed to have read them and be fully aware of their contents. The assumption is that a person has not only read it but also comprehended its meaning. In order to understand the concept of the doctrine of constructive notice in company law it is important to understand the concept of article of association and memorandum of association.

Memorandum of Association (MOA):

Section 2(5) of the companies act, 2013 defines a memorandum of Association “Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act”. Further section 4 of the act nature, structure, and content of the memorandum of association.

A Memorandum of association is the most crucial document in the establishment of a corporation. It outlines the basic aims and objectives of the organization. The MOA governs the activities of the incorporated company in such a way that the company may only lawfully engage in those activities that are stated in the MOA.

Lord Macmillan has defined a memorandum of association and observed that:

“it sets out the constitution of the company, it is, so to speak, the charter of the company, and provides the foundation on which the structure of the company is built. The importance of the memorandum lies in the fact that it defines the scope of the company’s activities as well as its relation with the outside world. Its purpose is to enable the shareholders, creditors, and those who deal with the company to know what is its permitted range of enterprise.”

The memorandum of association serves two vital purposes, which are apparent from the definition given above. firstly, it helps shareholders to know the purpose of the company, the way in which their funds are being utilized, and the risk involved. Secondly, knowing the company’s purpose will help the outsider determine whether their contract fits with that purpose.

Article of Association (AOA):

Section 2(5) of the companies act, 2013 defines an Article of Association: “Articles means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or of this Act”. Further section 5 of the companies acts, 2013 provides the nature and content of the Article of Association.

Lord Cairns L.C. described the function of AOA of a company in Ashbury Railway Carriage & Iron Co. Ltd. v. Riche,[1] as follows “The articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights, and powers of governing body between themselves and the company at large. And the mode and form in which business of the company may from time to time be made.”

Articles of Association is a legal document where the rules governing a company’s management are set down. It is a crucial document that outlines the internal policies and practices for the corporation’s shareholders, directors, and officers as well as the connection between the corporation and its stakeholders. A company’s articles of association are referred to as articles in short.

It should be remembered that the memorandum of association, which is the main and essential constitutional document of a corporation, supersedes the articles of association. The article of association cannot be ultra-virus to the memorandum of association.[2]

Guiness v. Land Corporation of Ireland, Lordships observed that “There is an essential difference between the memorandum and the articles. The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefit of the creditors the outside public, as well as of the shareholders. The articles of association are internal regulations of the company.”

Registration of AOA and MOA

Companies Act, 2013 mandates the registration of articles of association and memorandum of association. Memorandum and articles must be submitted for registration to the state’s registrar where the company’s registered office is to be located according to the memorandum. Further Section 7(1)(a) states that the memorandum and articles of the company must be duly signed by all the subscribers to the memorandum in such manner as may be prescribed.

A company can attain corporate status under the Companies Act, 2013 only after registration of the memorandum and articles. Every corporation has its memorandum and articles of association registered with the Registrar of the Company. Section 399 provides that memorandum of association and article of association when registered with ROC become public documents that can be inspected by anyone, whether member or outsider at the office of the registrar of companies on payment of a prescribed fee.

Effects of registration

Company will attain corporate status.
The memorandum and articles become public documents since the office of the Registrar is a public office.
Anyone, member or outsider, can inspect documents at the office of the registrar of companies upon payment of a specified fee.
It becomes the responsibility of a person doing business with a corporation to review all of its public documents to ensure that his contract complies with their terms.
The doctrine of constructive notice, which presumes that everyone who interacts with the corporation has knowledge of the document, will come into play.
No one can claim ignorance of the document as a defense in a court of law. Regardless of whether someone really reads them, he is to be in the same position as if he had.

These provisions make it clear that under the Companies Act, the Memorandum and Articles have been viewed as a public document and that everyone who interacts with the business is presumed to be aware of its contents.[3]

Duty of the company to send a copy of the document:

Section The company17 states that the company on receipt of a prescribed fee shall send a copy of the memorandum and articles to that person in electronic form within 7 days of such request. A corporation that fails to provide a copy within 7 days must be liable to pay the penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

All records that are available for public review ought to be considered public records. Additionally, notice is provided for not only the memorandum and articles but for any papers that must be registered with the Registrar in accordance with the Act, such as special resolutions [S. 117] and charge details [S. 77].

Case laws

In Oakbank Oil Co. v. Crum[4] It was decided that everyone who interacts with the business is deemed to have read and understood the MOA and AOA in their entirety. This kind of notice is known as a Constructive Notice.

Kotla Venkataswamy v. Chinta Ramamurthy[5] is one of the famous cases relating to this doctrine the facts and decision of the case are as follows.

It was stated in the company’s papers that the signatures of the managing director, working director, and company secretary were required in order to mortgage the firm’s property. A contract is not legally binding on the firm until all three signatures are present, as stated in the articles of incorporation.

But in this instance, the mortgaged deed given to the plaintiff lacked the managing director’s signature. As a result, during the company’s winding up, the issue of whether the mortgage deed was enforceable or not arose when the mortgagee claimed the company’s property. The responder claimed that he was unaware that a contract required three signatures in order to be enforceable.

The court held that the mortgage deed was invalid and further held that parties interacting with the corporation are presumed to be aware of the terms of its AOA and MOA, thus a defense of ignorance is not available.

Dehra Dun Mussoorie Electric Tramway Co. Ltd v. Jagmandar Das[6]

The company’s articles stated that all power, with the exception of the right to borrow, could be delegated by the directors. However, the managing agent’s use of an overdraft without board approval was deemed binding by the court, which ruled that such temporary loans must be kept out of the scope of the applicable provisions.

The exception to the doctrine of constructive notice:

The doctrine of indoor management acts as an exception to the doctrine of constructive notice. The doctrine of indoor management states third parties who engage with a corporation are shielded from any irregularities in the internal workings of the company. A corporation will be responsible for any losses incurred by third parties as a result of internal irregularities because third parties have no opportunity to discover these irregularities.

This doctrine originated in the case of Royal British Bank v Turquan, the directors of a company borrowed a sum of money from the plaintiff. The company’s articles provided that the directors might borrow on bonds such sums as may from time to time be authorized by a resolution passed at a general meeting of the company. The shareholders argued that since no such resolution had been passed authorizing the loan, it had been made without their consent. The company was, however, held bound by the loan. When it was established that the directors may only borrow pursuant to a resolution, the plaintiff was entitled to draw the conclusion that the required resolution had been approved.

The doctrines of constructive notice and indoor management differ in terms of whom they are intended to protect the former doctrine protects the company and the latter protects the outsider dealing with the company

Criticisms of the doctrine of constructive notice:

The idea of constructive notice is criticized for not being based on the realities of business life. According to them, the company is known to the general public through its officer and not through its articles and memorandum.

Conclusion

In conclusion, we can say that anyone doing business with the company is required to be aware of the key provisions of its legal documents. If a person enters into a contract that is illegal or does not comply with the rules governing the business the contract will be void, and the court will decide in the company’s favor. Thus, it is a general rule in company law that parties to a transaction are assumed to be aware of the fundamental documents of the company.

References