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Mumbai University · FY LLB · Sem II
Doctrine of Constructive Notice
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Doctrine of Constructive Notice
Q2Write Short NotesAttempt Any Two • 6 marks each • Total: 12 marks2024
(3)Doctrine of Constructive Notice

Meaning

The Doctrine of Constructive Notice is a legal principle in company law that holds that every person dealing with a company is deemed to have notice of the contents of the company's Memorandum of Association (MoA) and Articles of Association (AoA) — irrespective of whether they have actually read those documents. Since the MoA and AoA are public documents filed with the Registrar of Companies (and therefore open to public inspection), the law presumes that anyone contracting with the company has constructive knowledge of all their provisions.

Basis and Rationale

  • The MoA and AoA are public documents — any person can inspect them at the RoC office; ignorance of their contents is not a valid excuse.
  • The doctrine protects the company from being bound by contracts that exceed its authorised powers (ultra vires contracts) by attributing knowledge of those powers to contracting parties.
  • If a contract is beyond the powers of the company as stated in the MoA, the outsider who contracted cannot enforce it — they had constructive notice of the limitation.

Effect

A person who enters into a contract with a company that is ultra vires the MoA cannot later claim ignorance of the company's objects. The doctrine operates as a shield for the company against enforcing contracts it was constitutionally incapacitated from entering.

Criticism and Counter-Doctrine

The Doctrine of Constructive Notice operates harshly against innocent third parties, particularly where internal procedural requirements of the AoA have not been complied with. To mitigate this harshness, the Doctrine of Indoor Management (Turquand's Rule) was developed as a counterpoise — outsiders are not expected to verify whether the internal proceedings required by the AoA (e.g., board resolution, special resolution) were actually carried out; they may assume regularity of internal acts.

Kotla Venkataswamy v. Rammurthy (1934) ILR 58 Mad 786 — The company's AoA required that all mortgages must be signed by the Managing Director, Secretary, and one working Director. A mortgage signed only by the Secretary and one Director was held void against the company; the mortgagee had constructive notice from the AoA that the MD's signature was required. The lender could not enforce the mortgage.
Royal British Bank v. Turquand (1856) 6 E&B 327 — (Contra-doctrine) — A company's AoA required a shareholders' resolution before the directors could borrow. The bank lent money to the company relying on a bond signed by the directors. Held: the bank was entitled to assume the resolution had been passed — it was not required to verify the internal workings of the company. This case established the Doctrine of Indoor Management as the counterbalance to constructive notice.