Constructive Note of Memorandum and Articles of Association

Introduction:

 A company or a corporation, by law, is defined as a legally established entity that consents a group of individuals to apply for the formation of an autonomous and independent organization, to the government, which would then seek to achieve specific goals and targets and also be granted legal rights typically given to individuals such as the ability to claim damages, having their own property, borrow and lend money, hire employees etc. It is founded by a group of people with the purpose of carrying out commercial and business activities to earn profit. Being a legal entity, certain laws, rules, and regulations control the company’s formation and operation.  The goal of enacting such legislation is to safeguard both the corporation and its management, and any third party contractually engaged with the corporation. Companies create revenue by utilising the country’s resources. Companies and corporations, at the same time, also contribute to the advancement of the country’s economy, necessitating the formulation of laws that regulate them. These are a system of laws and rules that protect the firm from external parties and likewise while serving as a deterrent to unfair and unethical commercial or business operations.

The Doctrine of Constructive Notice

The memorandum and articles of association are the two most crucial documents required for a company’s registration and formation, both of which are public documents. The Memorandum of Association, often known as the MOA, is a legal document that must be filed under the registrar of companies during the company’s incorporation.  It is also referred to as merely a memorandum. It consists of all the fundamental and essential conditions under which a business operates. The article of association, on the other hand, is a document that lays out the rules for a company’s activities and defines its objectives. The article outlines how tasks will be undertaken and performed within the company, including how directors will be appointed and also the management of accounting statements and financial records. Both documents are available at the Registrar Office to the public, for inspection.

According to Section 399 of the Companies Act, 2013, any person may “inspect by electronic means any documents kept by the Registrar in accordance with the rules made, being documents filed or registered by him in pursuance of this Act, or making a record of any fact required or authorised to be recorded or registered in pursuance of this Act, on payment for each inspection of such fees as may be prescribed”^[1]. The section makes provisions for inspection of the following documents- memorandum of association, articles of association and certification of incorporation. The Doctrine of Constructive Notice suggests that an individual who holds or intends to hold any relationship with the corporation is familiar with the aforementioned documents. It implies that everyone and anyone who deals in the corporation is presumed to be well acquainted with its articles of incorporation and memorandum of association. The law always assumes that a person involved with the company is knowledgeable about the documents and has understood the same. Initially, this doctrine was only limited to cases under fraud. However, after the case of West v. Reid ^[2], the applicability of the doctrine extended to accommodate acts of gross negligence as well.

Purpose of a Constructive Notice

The primal objective of the Doctrine of Constructive Notice is to protect the company by way of preventing third parties from taking legal action against the company claiming that they had no knowledge about, or did not understand the existing powers, operations or positions of the company. According to the law, every party to a lawsuit is mandated to be notified of the same along with the copies of paperwork and documents submitted to the court. It is a basic legal concept that an individual is ought to be notified of a pending/ forthcoming legal action by a public posting. Constructive notice enables the defendant to be sought out via public posting. The Doctrine of Constructive is one of the most significant doctrines under Company Law. The doctrine plays an important role in safeguarding the corporation from outsiders and is limited to the corporation’s external affairs and positions. The Memorandum and Articles of Association, being public documents, entices the society with intricacies in the fields of economics, law and legislation, and infrastructure. The outsider conducts the company’s business while it is expected of the outsider to not only be familiar with the company’s documents but also thoroughly comprehend their exact nature. The doctrine of constructive notice is applicable to not just the Memorandum and Articles of Association; it extends to the rest of the documents that are filed with the registrar of companies under Section 117 of the Companies Act, 2013. Any third party dealing with the company business has the burden of responsibility to be fully cognizant of all the legal documents guiding the company and also entirely understand the provisions therein. This doctrine is always in the favour of corporate bodies.

 The Doctrine of Indoor Management

Subsequent to the Doctrine of Conservative Notice, another doctrine was formulated during the landmark case of Royal British Bank v. Turquand^[3]. This was the Doctrine of Indoor Management, commonly known as the Turquand Rule. This rule is in favour of the outsider instead of the company. The doctrine safeguards the interests of the outsider by regulating the actions and activities of the company. It permits everyone who does business with the firm to infer that the articles of incorporation have been followed by the company’s executives. The doctrine holds that, despite the fact that the third party should be aware of the contents of the specified documents, they are not obligated to inspect or investigate the internal affairs of the company to determine whether or not all internal processes and procedures have been abided by the company. The Doctrine of Indoor Management acts as an exception to the Doctrine of Constructive Notice of Memorandum and Articles of Association.

Exceptions to the doctrine in special cases include-

1. Knowledge of Irregularity– When the individual dealing with the irregularity was aware of it, the doctrine of indoor management cannot be used as a defence.
2. Void or illegal transactions– The law does not apply to agreements or transactions that are inherently void or illegal, such as forgery.
3. Negligence- If a corporate official performs an activity that is not normally within his authority, the individual dealing with him must conduct adequate enquiry and confirm the officer’s authority. He cannot rely on the rule if he fails to inquire.
4. Suspicious activities- If any of the company’s directors or other top executives see any unusual activity with the contract, they can promptly investigate and learn more about it. If in case the person is unable to discover the suspicious conduct and the person responsible, the court gives the business all the power it needs to find him quickly.
5. No knowledge of Articles- The rule cannot be applied to someone who failed to peruse and consequently rely on the Memorandum and Articles and consequently relied on them.

Application of the Doctrine of Constructive Notice

 During the case of Kotla Venkataswamy v. Chinta Ramamurthy^[4], the articles of the company followed the condition that the signatures of the working director, managing director and company secretary are required in the event that any company property is mortgaged. However, the case in question involved only two signatures, which were of the secretary and working director. It was held by the court that, due to the existence of only two signatures, the deed was invalid. There is no claim for the plaintiff under this. The court also held the assumption that an individual completely reads all the facts of a company and all the information of a deed before signing it, and thus the woman was assumed to also be aware of the fact that the deed only has two signatures and was invalid. Her claim this cannot hold. The case involves the Doctrine of Constructive Notice, which works in the favour of the company and not the outsiders. It is ultimately held that all articles and memorandum of a company must be thoroughly read by any individual dealing with the company. The company is not liable for any damages that occur after handing over all required information and documents.

In Dehra Dun Mussoorie Electric Tramway Co. Ltd. v. Janmandae Das^[5], the articles of the company stated that all powers, except the one to borrow, would be delegated by the directors of the company. However, the court held the managing agents liable for taking the overdraft without the board’s consent, stating that such temporary loans should be maintained outside the scope of related regulations. Because it is assumed that outsiders are aware of the public documents including information on specific clauses, internal management, and the company’s establishment, they cannot blame or hold the corporation liable for their own mistakes. Outsiders cannot claim ignorance for failing to read the documents carefully.

In the case of Re Jon Beauforte (London) Ltd (1953 1 Ch 131)^[6], the insolvent company’s stated objects were to produce dresses but it had been creating veneered panels for some time instead, all but one of the company’s creditors’ claims were found to be ultra vires due to actual knowledge of the company’s business and constructive notice of its declared purposes. The upshot of this rule of constructive notice, according to the court, was that when the firm’s operation was known to the third party and was ultra vires, whether he knew it or not, he would not be able to hold the corporation liable. In the instance of a company’s ultra vires conduct, the outsider cannot obtain remedy on the grounds that he was uninformed of the company’s capabilities.

Conclusion

Since only good businesses ensure the growth of trade and economy, the realm of business necessitates the protection of any and all contractual parties. In the course of the company’s daily operations, numerous parties enter into a variety of contracts. Under the Doctrine of Constructive Notice, any outsider dealing with companies is ought to have a constructive notice with regards to the contents of the articles of the company. This is implemented to ensure that the business world runs smoothly and efficiently. The doctrine, however, is often considered to be unrealistic since it is not practically possible to understand and know the exact nature of the articles of the company. As a result, to defend the interests of outsiders, the courts formulated the Doctrine of Indoor Management as an option in contrast to the Doctrine of Constructive Notice. Doctrine of Indoor Management held that the company’s internal operations are kept private and that an outsider need not investigate as to whether the company is operating in accordance with its Articles and Memorandum. While the Doctrine of Constructive Notice protects corporations from third parties or outsiders and has been beneficial to them, the Doctrine of Indoor Management was adopted to defend the interests of the outsiders as well. Both of these doctrines work in balance to safeguard the corporation alongside outsiders.

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References:

[1] Companies Act. 2013 § 399

[2] West v. Reid (1843) 2 Hare 249

[3] Royal British bank v. Turquand (1856) 6 E&B 327

[4] Kotla Venkataswamy V. Chinta Ramamurthy:  AIR 1934 Madras 579A

[5] Dehra Dun Mussoorie Electric Tramway Co. Ltd. v. Janmandae Das AIR 1932 ALL 141

[6] Re Jon Beauforte (London) Ltd ,1953 1 Ch 131