INTRODUCTION

Prior to registration of a company, the incorporators (promoters) are required to send very
essential documents i.e. memorandum and articles of association (MEMART) to the registrar,
this is so provided under section 14(1) of the Companies Act.1

Section 2 of the Companies Act defines ‘Memorandum’ to mean the memorandum of

association of a company, as originally framed or altered from time to time. The same
provision enlighten the meaning of ‘Articles’ as the articles of association of a company, as
originally framed or as altered by special resolution.2

These two documents i.e. Memorandum and Articles of association are of paramount
importance when it comes to the matter of guidance and governance of the company. There
are clauses which are inserted in these documents, so as to enshrine all the affairs and the way
to which those affairs are to be attended.

In memorandum of association one of the crucial clause is ‘objects clause’. The original
intention of ‘objects clause’ was that the incorporators would identify the purposes for which
the company was formed and that these would be publicly known.3 The House of Lords
decision in Ashbury Rly Carriage and Iron Co vs. Riche drew the conclusion that ‘objects
clause’ laid down the extent of the company’s contractual capacity and that any contract
entered into outside the terms of the ‘objects clause’ was ultra vires and, therefore, void.
Further, the contract could not be ratified by the shareholders, even voting unanimously on a
resolution to adopt the contract.4

This approach of ‘objects clause’ in relation to ultra vires can also be seen Re. Jon Beau
forte5where, a company had been incorporated with an ‘objects clause’ which authorised the
company to carry on business as makers of ladies’ clothes, hats and shoes. However later on
the decided company to manufacture veneered panels. To further this latter business, the
company contracted with a builder to construct a factory, entered into a contract with a
supplier of veneer and ordered coke from a coke supplier to heat the factory. All three
remained unpaid when the company went into liquidation and the liquidator rejected their

1
[CAP 212 R.E 2010]
2
Ibid
3

4
[1875] LR 7 HL 653
5
[1953]Ch. 131
proofs in the winding up on the ground that the contracts were to further an ultra vires
activity and were, therefore, void.

On the other side of the coin, ‘Articles of association’ is much focused on the internal affairs
of the company this is also evidenced in the case of Eley vs. Positive Government Life
Assurance6 where the company’s articles stated that the plaintiff was to be appointed as its
solicitor. It was held, however, the plaintiff could not use the article to establish a contract
between himself and the company. The articles only created a contract between the company
and its members, and, although the plaintiff was a member of the company, he was not suing
in that capacity but in a different capacity, namely, as the company’s solicitor.

As elucidated in the explanation above, the Memorandum and Articles of association assume
the character of public documents. Hence every outsider dealing with the company is deemed
to have a notice of the contents of the MEMART. That is known as ‘constructive notice’ of
memorandum and articles of association.

This doctrine of ‘constructive notice’ presupposes that, every person dealing or proposing to
enter into a contract with the company is deemed to have constructive notice of the contents
of the memorandum and articles of association, whether he actually reads them or not.7

MAINBODY

In the light of the assertion, an act which is ultra vires is void although it may not necessarily
be illegal and sometimes such an act may be void ab initio, and where there is anything paid
by contracting party the same cannot be recovered under litigation. But when the act is intra
vires the company outside the authority of directors the company through can ratify.

The assertion as explained above, cast crucial aspect in so far as the relationship between the
company and outsiders is concerned. The basis of such relationship was primarily reflected
under the doctrine of ‘constructive notice’.

However this doctrine of ‘constructive notice’ by fixing contracting parties with notice of the
contents of its registered documents could have had even worse commercial consequences
thus it attracted amendments to cure the same. Through those amendments the doctrine of ‘In
door management’ emerge.

6
(1876) Ex 88
7
[1946] All ER 546
According to the doctrine of ‘In door management’ where a person dealing with a company is
satisfied that the proposed transaction is intra vires the memorandum and articles, he is not
bound to inquire whether the internal proceedings were correctly followed.8

By the virtue of the position in UK, the stepping stone for such amendments was the rule in
Royal British Bank vs. Turquand, which among other thing it established that, “whilst a
person dealing with a company might be deemed to know of certain limitations and
procedures contained in the constitution which had to be followed before a company could
enter into a transaction, he was not obliged to investigate into the internal affairs of the
company to see whether the requirements of the constitution and regulations of the company
had been complied with.”9

There is also a well-known statement of the rule in Morris vs. Kanssen, where Lord
Simonds approved a passage from Halsbury’s Laws of England, which stated that: “...
persons contracting with a company and dealing in good faith may assume that acts within
its constitution and powers have been properly and duly performed and are not bound to
inquire whether acts of internal management have been regular.”10

In Tanzania, Section 36(1) of the Companies Act11 reflect what is provided in Turquand’s
case by imposing a favour to a person dealing with a company in good faith to be free from
any limitation under company’s constitution.

There are three key reasons which necessitated amendment of ‘constructive notice’ which
seems to be very harsh especially to outsiders who wishes to enter into a contractual
relationship with the company, those reasons are:

To protect person acting in good faith without notice of the irregularity and this was
interpreted to include absence of grounds for suspicion that there was any failure to comply
with internal irregularities.

To bind persons within the management of the company (for example, a director); these are
persons who would be deemed to know of any irregularity in the internal management of the
company no matter how unrealistic, in fact, that might be, for this amendment of constructive
notice these persons are now barred to act ultra vires when they are dealing with outsiders.

9
(1856) 6 E & B 327
10
[1946] AC 459.
11
To avoid forgery; if a document is discovered to be a forgery, it is a nullity, and no legal
consequences can flow from it. The definition of what constitutes a forgery, though, is the
subject of some difficulty. Certainly, if an unauthorised outsider obtains the company’s seal
and uses it on a document, forging the signatures of the directors, this will be held to be a
forgery. But, where there are genuine signatures of the directors and simply an unauthorised
use of the seal, it is difficult to justify a finding of forgery, since the company is holding out
those persons as having authority to represent the document as genuine

CONCLUSION

Generally, amendment of the strict rule of ‘constructive notice’ by the current rule of ‘ in
door management’ is very useful for a contracting party, especially where a company’s
articles fixed the number of directors needed to constitute a quorum for a board to make valid
decisions but, unknown to the contracting party, also, where the company’s articles provided
for a certain number of directors’ signatures on a document and, although these might have
been obtained, unknown to the contracting party.