Doctrine of constructive notice ppt
- 1. Doctrine of Constructive Notice When the Memorandum and Articles of Association of any company, are registered with the Registrar of Companies they become “public documents” as per section 399 of the Act. This implies that any member of the general public may view and inspect these documents at a prescribed fee. A member of the public may make a request to a specific company, and the company, in turn, must, within seven days send that person a copy of the memorandum, the articles and all agreements and resolutions that are mentioned in section 117(1) of the Act. If the company or its officers or both, fail to provide the copies of the requisite documents, every defaulting officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or Rs. 1,00,000 whichever is less. Therefore, it is the duty of every person that deals with the company to inspect these public documents and ensure in his own capacity that the workings of the company are in conformity with the documents. Irrespective of whether a person has actually read the documents or not, it is assumed that he familiar with the contents of these documents, and that he has understood them in their proper meaning. The memorandum and articles of association are thus deemed as notices to the public, hence a ‘constructive notice’.
- 2. Illustration If the articles of Company A, provided that any bill of exchange must be signed by a minimum of two directors, and the payee receives a bill of exchange signed only by one, he will not have the right to claim the amount.
- 3. Doctrine of Indoor Management The concept of the Doctrine of Indoor Management can be most elaborately explained by examining the facts of the case of Royal British Bank v. Turquand, which in fact, first laid down the doctrine. It is due to this that the doctrine of indoor management is also known as the “Turquand Rule”. The directors of a particular company were authorised in its articles to engage in the borrowing of bonds from time to time, by way of a resolution passed by the company in a general meeting. However, the directors gave a bond to someone without such a resolution being passed, and therefore the question that arose was whether the company was still liable with respect to the bond. The company was held liable, and the Chief Justice, Sir John Jervis explained that the understanding behind this decision was that the person receiving the bond was entitled to assume that the resolution had been passed, and had accepted the bond in good faith.
- 4. Role of the doctrine of indoor management Therefore the primary role of the doctrine of indoor management is completely opposed to that of constructive notice. Quite simply, while constructive notice seeks to protect the company from an outsider, indoor management seeks to protect outsiders from the company. The doctrine of constructive notice is restricted to the external and outside position of the company and, hence, follows that there is no notice regarding how the internal mechanism of the company is operated by its officers, directors and employees. If the contract has been consistent with the documents on public record, the person so contracting shall not be prejudiced by any and all irregularities that may beset the inside, or “indoor” operation of the company.
- 5. Exceptions to the Doctrine of Indoor Management 1) Where the outsider had knowledge of the irregularity— Although people are not expected to know about internal irregularities within a company, a person who did, in fact, have knowledge, or even implied notice of the lack of authority, and went ahead with the transaction regardless, shall not have the protection of this doctrine. Case: In Howard v. Patent Ivory Co. The articles of a company only allowed the directors to borrow a maximum amount of one thousand pounds, however, they could exceed this amount by obtaining the consent of the company in a general meeting. However, in this case, without obtaining this requisite consent, the directors borrowed a sum of 3,500 Pounds from one of the directors in exchange for debentures. The company then refused to pay the amount. It was eventually held that the debentures were only good to the extent of one thousand pounds since the director had full knowledge and notice of the irregularity since he was a director himself involved in the internal working of the company.
- 6. 2) Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect someone who has not acquainted himself with the articles or the memorandum of the company For example in the case of Rama Corporation v. Proved Tin & General Investment Co. wherein the officers of Rama Corporation had not read the articles of the investment company that they were undertaking a transaction with. 3) Negligence— This doctrine does not offer protection to those who have dealt with a company negligently. For example, if an officer of a company very evidently takes an action which is not within his powers, the person contracting should undertake due diligence to ensure that the officer is duly authorized to take that action. If not, this doctrine cannot help the person so contracting, such as in the case of Underwood v. Bank of Liverpool.
- 7. 4) Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the lack of free will while entering into the transaction, and hence does not invoke the doctrine of indoor management. For example, in the case of Ruben v. Great Fingal Consolidated, the secretary of a company illegally forged the signatres of two directors on a share certificate so as to issue shares without the appropriate authority. Since the directors had no knowledge of this forgery, they could not be held liable. The share certificate was held to be in nullity and hence, the doctrine of indoor management could not be applied. The wrongful an unauthorized use of the company’s seal is also included within this exception. 5) Further, this doctrine cannot include situations where there was third agency involved or existent. For example, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd. this doctrine could not be applied where there was any scope of power exercised by an agent of the company. The doctrine cannot be implied even in cases of Oppression.
- 8. Conclusion Therefore, it is to be understood that in the sphere of corporate governance, the articles of a company is a crucial document which, along with the memorandum from the company’s core constitution and rule book, and hence defines the responsibilities of its directors, kinds of business es to be undertaken by the company, and the various means by which the shareholders may exert their control over the directors, and the company itself. While the memorandum lays down the objectives of the company, the articles lay down the rules by which these objectives are to be achieved. In cases of conflict, the Memorandum supersedes the Articles and the Companies Act further, supersedes both Memorandum and Articles. These articles may be altered as per Section 14 of the Companies Act, 2013. The entrenchment provisions in the Articles of a company protect the interests of all the minority shareholders by ensuring that amendment in the article can only occur after obtaining the requisite prior approval of the shareholders. The Articles of a company bind the company to its members and bind the members to the company and further also bind the members to each other, they constitute a contract amongst themselves and therefore, its members with respect to their rights and liabilities as members of the company.