In India, every company is required to draft documents laying down rules and regulations for dealing with outsiders and regulating the company’s internal affairs. The Memorandum of Association (MOA) and the Articles of Association are the two documents that provide the ground rules for the company and third parties dealing with the company (AOA). The company’s memorandum and articles of association are both governing documents. The memorandum of association comprises the main provisions that are necessary for the formation of the business, including the Name, Registered Office, Objectives, Liability, and Capital provisions. The guidelines for the management of the firm are found in the Articles of Association or the bylaws or the internal regulations of the company. While incorporating the Company, these two documents are required to be filed with the Registrar of Companies. The memorandum is filed as e-MOA in form INC 33 and the Article is attached in the form of e-AOA in Form INC 34 linked to the SPICe form. The Simplified Proforma for Incorporation of Companies electronically, or SPICe form, is a document that must be submitted to the Registrar when a company is incorporated. The incorporation of the firm was approved by the Registrar once he or she had reviewed the Memorandum and Articles and found them to be satisfactory. Once the company is incorporated, the MOA and the AOA are available on the website of the Ministry of Corporate Affairs for public display, and anyone dealing with the company can access these documents.
WHAT IS THE DOCTRINE OF CONSTRUCTIVE NOTICE?
The doctrine of constructive notice is the principle under company law that presumes the acknowledgment of particular information regarding the MOA or AOA of the company in the eyes of law. Even if the actual information or notice has not been served. It is based on the legal maxim “ignorantia juris non excusat” meaning ignorance of the law is not excusable and it is assumed that there has been knowledge of the law. It is the responsibility of the party to check and scrutinize all the necessary documents of the company to check the veracity of the company and its working. The information regarding the company is dispensed through documentation, newspapers, magazines, and electronic media and is available in the public domain.
The doctrine of constructive notice constitutes two central bodies, i.e., Memorandum of Association and Articles of Association. The Memorandum of Association states how the company sets up its power and areas of operations and the Articles of Association state the working rules and regulations of the management of the company. A person while incorporating a relationship with the company is mandated to look for these documents and after setting up the contract with the company it has no obligation to justify his/her negligence. A person should not only read the memorandum or articles but should also interpret them in the words they are stated by the company before entering into a contract with the company. This doctrine protects the company against outsiders as no action can be taken by outsiders if they entered into a contract without knowing a memorandum or articles. The contract which goes beyond the limitation and regulation stated in the memorandum or articles of association is void ab initio in the eyes of law and cannot be enforced in a court of law. The person establishing a contractual obligation with the company without understanding its memorandum and articles has to bear the consequences arising out of such a contract.
This doctrine has its roots in the common law and it is applicable in England and India. Some other countries also adopted the doctrine of constructive notice due to its credibility.
The authority related to this doctrine is Kotla Venkaswamy v. Chinta Ramamurthy and Ors., the facts of this case are as follows:
Following the company’s articles, the managing director, secretary, and working director must all sign documents on behalf of the business. A mortgage deed signed by the secretary and one active director alone was provided to the plaintiff by the business. It was decided that the plaintiff could not have received such a deed because it lacked the necessary signatures. The deed was declared 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 specified 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 purposes of the company, the bond is nevertheless invalid.”
In Oakbank Oil co. v. Crum, it was asserted that a person dealing with the company is “taken not only to have read those documents but to have understood them according to their proper meaning.”
IMPACT OF DOCTRINE OF CONSTRUCTIVE NOTICE
The doctrine of constructive notice construes ramifications for the person interacting with the corporation. The party doing business with the corporation is responsible for inspecting the documentation. The person establishing a contract with the company has to face the implication to check that his/her contract complies with the rules and regulations of the company. The third party working with the company is expected to be familiar with both its executives’ positions and the company’s authority. The person interacting with the company should be well aware of their legal obligations and how they operate. This doctrine obstructs the third party from establishing a business relationship with the company. The doctrine of constructive notice extends beyond memorandum and articles and covers other documents such as special resolutions under its ambit.
AN EXCEPTION TO THE DOCTRINE OF CONSTRUCTIVE NOTICE: THE DOCTRINE OF INDOOR MANAGEMENT
To restrain the power of the company under the doctrine of constructive notice, the Doctrine of indoor management is introduced. This doctrine has opposed the doctrine of constructive notice. Under the doctrine of indoor management, an outsider or a third party is empowered against the internal working of the company. This principle states that while entering into a contract it is not required by the other person to look into the internal matters of the company, who is acting in a good faith. If any such internal matter poses a problem in the completion of the contract then the company will be held liable. This doctrine also goes by the name ‘Turquand’s Rule’, as this doctrine came into effect from the well-known English case of Royal British Bank v. Turquand. In this case, the company’s articles of association allowed the directors to borrow any amount of money after presenting a resolution to the general meeting and only after the approval of that resolution. Without obtaining company approval, the corporation borrowed money from the bank and refused to pay back the debt. It was decided that this settlement was a company’s internal concern. As a result, the corporation will be responsible for repaying the debt. The fact that this doctrine favored the third party brings a lot of criticism to this doctrine.
The Doctrine of constructive notice puts unlimited power in the hands of the company at the expense of the exploitation of the third party. This rule supports the company to a greater and thus, the need for the doctrine of indoor management was felt and it came into being. While the doctrine of constructive notice supports the company, the doctrine of indoor management supported the outsiders. In the doctrine of constructive notice, there was no check on the powers of the company but that is not the case with the doctrine of indoor management as there are some exceptions to this doctrine to check its misuse.
Author(s) Name: Sharen Joel (Aligarh Muslim University)