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H.P National Law University, Shimla: Assignment
H.P National Law University, Shimla: Assignment
Assignment
COMPANY LAW
Submitted To
Dr. ALOK KUMAR
Submitted By
KUNAL MEHTO
Roll no. – 16
BA.LLB.(HONS.) –V SEMESTER
CONCEPT OF CONSTRUCTIVE NOTICE AND ITS
IMPACT ON THE COMPANY AND THIRD PARTY
Introduction
Doctrine of Constructive Notice was introduced in the earliest days of the modern companies
law. At that time, the concept of limited liability was not yet born and the insecurity posed by
this doctrine to the creditor, was balanced by the risk of the shareholders in incurring unlimited
liability. However, with the arrival of Limited liability, the judiciary constantly has tried to
bypass or do away with this doctrine completely.
Constructive notice is the legal fiction that signifies that a person or entity should have known,
as a reasonable person would have, even if they have no actual knowledge of it. For example,
if it is not possible to serve notice personally then a summons may be posted on a court house
bulletin board or legally advertised in an approved newspaper. The person is considered to
have received notice even if they were not aware of it.
In companies law the doctrine of constructive notice is a doctrine where all persons dealing
with a company are deemed to have knowledge of the company's articles of association and
memorandum of association. The doctrine of indoor management is an exception to this rule.
In India the rule was never too strictly applied but continues to persist.
Constructive Notice
According to the doctrine of constructive notice, every outsider dealing with a company is
deemed or presumed to have notice of the contents of the memorandum and articles of
Association, which are public documents and therefore open to inspection. They can be
inspected by ‘any person’1. This kind of presumed notice is called ‘constructive notice’.
After being registered with the Registrar of Companies, the
memorandum and articles become public documents and may be inspected by any on payment of
1
SECTION 399 OF COMPANY ACT, 2013
the prescribed fee. On account of it, every person dealing with the company is expected to have
read and understood the Contents of the documents before making any contract with the
company and if he does not he will have to bear its consequences. Thus, a person dealing with a
registered company is presumed not only to have read the public document like memorandum,
articles and other regulations which form the constitution of the company but also to have
understood them according to their proper meaning. 2 Whether he has read these documents or
not, he is presumed to have notice of their contents.3
In the case of Mahony v. East Holyford Mining Co.4 Lord Hatherby said “Every joint stock
company has its memorandum and articles association open to all who are minded to have any
dealings whatsoever with the company, and those who so deal with them must be effected with
notice of all that is contained in those two documents.”
It is to be noted that a person dealing with a registered company is presumed not only to have
the notice of the company’s powers but also the Powers of its officers.5
It is also notable that such presumption cannot be inferred in respect of all kinds of documents,
registered with the company; for the purpose such documents may be divided into two groups:
(a) The documents affecting the powers of the company and its agents, and
(b) Other documents, i.e., the documents not affecting the powers to the company and its
agents.
A person dealing with a registered company is presumed to have read and understood the public
documents affecting the powers of the company and its officers, e.g. memorandum, articles and
special resolution, etc, but cannot be presumed to have read and understood the documents not
affecting the powers of the company and its officers, e.g., balance sheet, accounts and return etc.
An application of the doctrine of constructive notice is found in the case of Kotla Venkata Swami
V. Ram Murthi,6 also. In this case, the articles required all the deeds to be signed by the
managing director, the secretary and a working director on behalf of the company but a deed of
2
GRIFFITH V. PAGET, 6 CH. D. 517 OAKBANK OIL CO. V. CRUM, 8 APP. CAS. 65; G.I. & C. COMPANY, L.R. 7 EQ.
29; COUNTRY GLOUCESTER BANK V. RUDRY, ETC. CO., (1895) 1 CH. 629; OWEN AND ASHWORTH’S CLAIM, (1901)
CH. 115
3
KREDJT BANK CASSED V. HENKERS, (1927) 1 K.B. 826.
4
(1875) L.R. 6 FT.L. 869.
5
BARON PARKE IN RIDELY V. PORTSMOUTH GRINDING CH., (1848) 2 EX. CH. 711.
6
A.I.R. 1934 MAD. 579.
mortgage was singed only by the secretary and a working director and the deed was accepted by
the plaintiff. The plaintiff was not entitled to enforce it because if she (the plaintiff) had read the
articles, she would have discovered that a deed such as she took required execution by three
specified officers of the company and would have refrained from accepting a deed inadequately
signed.
7
FINANCIAL TIMES, NOV. 27, 1985 1986 JBL 10
8
A.I.R. 1932 ALL. 141
Effects.-
The effect of the doctrine of constructive notice may be summed up as follows:
3. Inconsistent agreements -
Person dealing with the company is presumed to have the notice of the contents of articles and
consequently he cannot make a contract with the company which purports to override any rights
created by the articles.
The doctrine of constructive notice protects the company but not the outsiders dealing with the
company. Sometimes the doctrine creates much hardships for the outsiders. They are presumed
to have the knowledge of the public documents like the memorandum of the company but in
practice it is very difficult and time consuming to have the complete knowledge of them before
making any contract with the company. Thus, the doctrine is inconvenient and unreal. It has
failed to take note of the realities of business life 9. On account of its evils the doctrine has not
been taken seriously both in U.K. and India 10. In England the doctrine has been abrogated by the
European Communities Act. 1997. 11
The doctrine of constructive notice is subject to the following doctrines :
I. Doctrine of Indoor Management
II. Doctrine of Holding out
The cases in which the doctrine has been applied may discussed under the following heads.18
17
(1856) 6 E&B 327
18
PENNINGTON’S COMPANY LAW (THIRD ED.) P. 114
19
PUDURNJEC & CO. V, MOOS, A.I.R. 1926 BOM. 28; P.C. MITRA V. ROAD OIL (INDIA) LTD., (1929) I.I..R. 57 CAL.
1101
20
SREE MINAKSHI MILLS V. CALLIANJEE, A.I.R.1935 MAD,. 799.
21
MAHONY V. EAST HOLYFORD MINING CO., (1875) L.R. 7 H.L. 869.
of the company has not been approved by a resolution passed at a regularly convened board
meeting. We will consider here the fate of such transaction.
In short the position of law appears to be that the act done on behalf of company by the directors
will be binding on the company even if the meeting of the Board was irregular as no present or
proper notice of the meeting of the board was given in advance to each director, 22 provided the
outsider dealing with the company is still protected because he is presumed to have the
knowledge of the number of directors who from quorum, but he is not required to see that the
number of directors in fact attended the board meeting 23 and this is logical because even though
the outsider knows what number of directors should attend he had so means of ensuring that
number actually did attend.24
Similarly an act done by the directors in the name of the company will be binding on the
company even if the act has been done without a board meeting being held at all, provided the
outsider dealing with the company has no knowledge of it.25 Its reason is that the outsider has no
means to discover whether a board meeting has been properly held. Thus a debenture, which was
issued under the seal of the company, was held binding on the company, even though no board
meeting to sanction its issue was held at all.
22
BROTONE V. LA TRINIDAD, (1887) 37 CH. D. 1
23
PRINCE OF WALES ASSURANCE SOCIETY V. ATHENAEUM ASSURANCE SOCIETY, (1858) 3 C.B.N.S. 756, DAVIS V.
R. BOLTOM & CO., (1894) 3 CH. 678.
24
PENNINGTON, ‘COMPANY LAW’, (THIRD EDN.) P. 118
25
DAVIS V. BOLTOM & CO. (1894), 3 CH. 678: DUCK V. TOWERING GALVANIZING CO. (1901) 2 KB. 314.
26
P.S. SANGAL, ROYAL BRITISH BANK V, THRQUAND & INDIAN LAW, (1964) 2 COMP. L.J. 173.
fulfilled or the procedure has not been followed. Its reason is that the outsider may be presumed
to have knowledge of the conditions required to be fulfilled or procedure required to be followed
before the exercise of the power but he cannot be presumed to have 0wlcdge of the fact that the
conditions have not been fulfilled or the procedure has not been followed. He has no means of
knowing that the conditions or procedure prescribed by the memorandum or articles have
actually been adhered or not. The best illustration is found in Turquand’s case which facts have
been stated above.
In Hampshire Land Co.27,’ it has been held that if the directors have authority to borrow
money on behalf of the company up to a certain limit specified in the articles and also in excess
of the limit if a general meeting of the company consents, the borrowing in excess of the
specified limit will be on the company even if the necessary consent has not been taken provided
the lender is unaware of the fact that the necessary consent has not been taken. Its reason is that
the lender is entitled to assume that the necessary consent has been taken before the borrowing in
excess of the limit.
In British Thomson Houstom Company Ltd. v. Federal European Bank Ltd.28, by articles, the
directors were empowered to delegate one or more or their own body such of the powers
conferred on the directors as they consider requisite for carrying on business of the company and
to determine who should be entitled to sign on the company’s behalf bills, receipts, acceptances,
contracts and documents. N. Pal, one of the directors, executed a guarantee. The company
contended that the director had no authority to execute the guarantee and therefore it was not
bound by it. The Court held that the company was liable on the guarantee because the plaintiff
was entitled to assume that N. Pal had been authorized by the directors to sign a contract on
behalf of the company.
1. Notice of irregularity:
27
(1896) 2 CH. 743.
28
(1932) 2 K.B.77
The doctrine of indoor management or the rule of Turquand’s case does not apply if the party
affected by an irregularity may be taken to have ow1edge of such irregularity if he was himself a
party to the internal management.
In Howard v. Patent Ivory Manufacturing Co 29. the articles empowered the directors to hot-row
up to pounds 1000 and such further sums as the general meeting might authorize. The company
borrowed pounds 3,500 from the directors without the authority of the general meeting and
issued debentures to them. The Court held that the debentures were valid to the extent of pounds
1000 only. Since the directors were themselves party to the internal proceedings they were taken
to have the notice of the fact that the necessary resolution had not been passed and therefore they
could not be protected by the rule in Turquand's case (or the doctrine of indoor management).
However, in Hely-Hutclunson V. Brayhead Ltd.30 the above men principle, that a person who is a
party to the internal management will be deemed to have the knowledge of the irregularity of
internal proceedings (if any), has not been strictly followed. The Court held that a person cannot
be deemed to have the knowledge of the irregularities of internal management merely because he
is a director and consequently a part of the internal machinery.
However, the view that a person who is himself a part of internal, machinery should be
deemed to have knowledge of the irregularity of internal management appears to be more correct
and practical.
The principle that a person dealing with the company will not be protej1 he has
knowledge of the irregularity, is not confined only to persons dealing with the company but
extend to the cases where one company has dealing with another company. Thus, where a
company dealing with another company affected by the irregularity in the internal management
of the other company, it cannot be protected under the rule in Turqitand’s case if it had notice of
the irregularity.31Ordinarily, a company is not automatically deemed to have the knowledge of
the irregularity in the internal management of the company with which it is dealing merely
because it has a common officer (as director or secretary) with that other company, but the
company may be presumed to have the knowledge of the irregularity if the common officer had
some duty imposed upon him to communicate the knowledge to the other company, and had
29
(1888) 38 CH. P. 156.
30
(1966) 1 Q.B. 549.
31
T.R. PRATT LTD. V. SASSON & CO. LTD., 37 BORN. L.R. 978.
some duty imposed upon him by the company which is alleged to be affected by the notice to
receive the notice.32
In Re, Hampshire Land Co33., the directors of a company were empowered to borrow
money on behalf of the company but not beyond a certain limit without the consent of a general
meeting. The directors borrowed beyond this limit and a general meeting gave the required
consent, but the notice summoning the meeting did not state that the borrowing to be authorized
was beyond the limit. The secretary of the company borrowing the loan was also the secretary of
the society lending the company and he knew of the irregularity. The Court held that the
knowledge acquired by the secretary as officer of the company could not be imputed to the
Society because he was under no duty to communicate it to the society and no duty was imposed
on him by that society to receive it. Thus, the borrowing was binding on the recover it company
and society (lender) was entitled to recover it.
3. Forgery:
The doctrine of indoor management does not apply where the act, done in the name of the
company are void ab initio. Thus, if the document on which the person seeks to rely is a forgery
the doctrine of indoor management will not be app1icable.
In Roben v. Great Fingall Consolidated37, the question arose whether the company was bound by
a short’ certificate to which the company’s seal had been affixed by the company's secretary
without authority and the forged signatures of two directors were added. In this case, the share
certificate was issued by company’s secretary who had forged the signatures of two directors and
35
(1927) KB. 826.
36
A.I.R. 1942 Oudh. 417.
37
(1906) A.C. 439.
affixed the seal of the company without any authority, It was held that the company was not
bound by the share certificate because it was forged and, therefore, a Lord Lore burn has
observed that the doctrine of indoor management applies only to irregularities that otherwise
might affect a genuine transaction, but it cannot apply to a forgery.
However, a company may be bound even by a forged document on the ground of holding
out or estoppel. A company may be estopped from relying on the fact of forgery if the forged
document has been represented as genuine by officer or agent of the company having actual or
ostensible authority to do so.38 Thus as Thompson has observed, the company will be bound even
by a forged document if the company represents that the forged instrument is genuine because in
such a case it will be estopped from denying that forged instrument is genuine as against an
outsider who has relied to his detriment upon the representation. 39 Besides, a company will also
be bound by a forged document provided the outsider pleading estoppel against the company has
relied on the forger’s apparent authority to execute the instruments. Thus, where a director who
has ostensible authority to borrow money under its memorandum and articles commits fraud of
the company by not placing the money borrowed by him on behalf of the company, the
borrowing will be binding on the company provided the lender is bona fide and thus the
company cannot be allowed to refuse the payment of the loan on the ground of the fraud of its
own officer.40
42
HOUGHTION & CO. V. NORHARD, LOWE AND WILLS LTD., (1927) 1KB. 246
43
IBID
44
ibid
The better view is that if an outsider dealing with the company entered into a contract
with an individual director of the company purporting to act on its behalf and the contract is
within the apparent or ostensible authority of the director, the contract will be binding on the
company even if the outsider had no knowledge of the articles of the company when he
contracted with the director, unless it is proved that the company under its memorandum or
articles, had no capacity either to make such contract or to delegate the authority to make such
contract to the director.45
Conclusion
The rule of constructive liability is a unrealistic doctrine. It is an imaginary doctrine and is a
fiction created by the judicial pronouncement of the Courts. Innumerable parties enter into a
number of contracts in everyday business of the company. This doctrine expects each and every
outsider not only to know the documents of the company but also presume to understand the
exact nature of documents, which is practically not possible. In reality, the company is not
known by the documents but by the people who represent it and deal with an outsider. The
outsiders do the business and enter into contracts not always on the basis of documents of the
company but the goodwill and the reputation of the directors or officers who are representing the
company.
This is the reason why the British Courts and Indian Courts have shifted its approach in dealing
with the cases relating to the outsider of the company. The Indian Courts have not given much
importance to this doctrine. The European Communities Act has also abrogated the concept of
constructive notice by bringing Section 9 of the Act which recognizes the concept of good faith
in business transaction. This provision is in the tune of the reality of the business transaction,
where the outsiders of the company enter into the various contracts not on the basis of the
documents of the company but on the good faith of the company.
This is the reason why the courts have evolved the doctrine of indoor management as an
opposite to the doctrine of constructive notice in order to protect the interests of the outsiders.
45
British Thompson Houston Co. v. Federated European Bank Ltd., (1932) 2 KJ. 176; Kredit
Bank Cassel v. Schenkes Ltd., (1927) 1 K.B. 826 MahOllICd v. Ravcit Bombay House, (1958)
S.A 704; Lakshmi Rattan Lal Cotton Mills V. J.K. Jute Mills, A.LR. 1975 All. 311; Freedom
Lockyer v. BucklZttrSt Park Properties (Maitgai) Ltd., (i964) 2 Q.B. 480.
The researcher on the basis of the various commentaries on the subject and the cases decided by
the British Courts and Indian Courts is of view that merely registration of a company should not
constitute the notice of the documents submitted to the registrar. Also, an outsider should always
have the freedom to make some assumption which a reasonable person may infer into the
particular circumstances.