Meaning of Constructive Notice in Company Law

The law presumes that all individuals who conduct business with a corporation possess complete knowledge of its public documents, including the Memorandum of Association and the Articles of Association. The documents are stored at the Registrar of Companies office and can be accessed by the public for examination. The company requires all external parties to comprehend its operational limits before they proceed with any business dealings.

Meaning of Constructive Notice

A notice may refer to a notification given to any person to acquaint him with certain facts so that he may take appropriate actions on that behalf.

Notices could be of two types:

Real or Physical: That is existing in paper and ink, sent to the person acquainting him with the facts containing therewith.
Constructive or deemed: That is not existing in real form but deemed to convey a certain fact.

This doctrine of Constructive notice is based on the latter type. It is a deemed notice of certain facts about the MOA and AOA.

Meaning of the Rules of Constructive Notice

What is meant by the doctrine of constructive notice of certain facts about the AOA and MOA? This doctrine is based on the principle of the presumption of knowledge and is mostly relevant in company law. As we know, every company must register its MOA and AOA, i.e Memorandrum of Association and Articles of Association, with the register of companies. The registrar of the company, being a public office on registration of these two documents, makes these two documents public.

Any person dealing with the company is presumed to have read these two documents and understood them in their true meaning. This demands knowledge of two documents and their contents, which is said to be the doctrine of constructive notice.

Now, when a person deals with a company which is not in accordance with the provisions of the memorandum and articles of association, or enters into a transaction that is beyond the scope and powers of the company, such a person will not be protected by law but will have to bear the consequences on their own.

The doctrine of constructive notice is not a positive doctrine but a negative one. It prevents alleging that a person did not know a particular act is ultra vires the company. It is therefore the responsibility of the party entering into the contract with the company to inspect the documents and understand them in their true meaning.

Case Law

It was held in the case of Ashbury Railway Carriage and Iron Company Limited vs. Riche that the company’s contract to finance Riche for laying down tracks in Belgium is ultra varies i.e null and void, because the object of making, selling, hiring railway carriages and wagons, mechanical engineering and general contracts It never mentioned financing contracts.

The court applies a rule of interpretation of statutes, i.e., ejusdem generis held that the term and general contracts would derive their meaning from the preceding specific word, i.e., engineering contracts, and it does not cover financing contracts. In this case, Riche did not get compensation because of the doctrine of constructive notice.

In another instance in Kolta Venkataswamy v Chinta Ramamurthy, AIR 1934 Madras 579. It was mentioned in the Articles of Association of the company that if at any time the properties of the company were to be held as a mortgage, three signatories, namely, the managing director, working director and the company’s secretary, would be mandatory.

But while a mortgage deed was being executed in favour of the plaintiff, it was noticed that there were only two signatures. The managing director’s signature was missing. The court held that the mortgage deed was invalid as the plaintiff, being an outsider, must have read the public documents of the company, i.e., the Articles of association before dealing with the company.

Implications for Businesses and Contractual Relationships

The evolution of the common law rule of constructive notice has significantly changed contractual relationships in the corporate world. Companies must be protective about informing their business partners about any relevant restrictions, requirement or processes. They must also ensure that their own internal processes are being performed diligently and that all necessary approvals are obtained before entering into contracts.

Conclusion

To summarise, while the common law rule on constructive notice has historically provided more protection for companies than for parties, in modern corporate governance, it has now evolved to adopt a more balanced approach. The responsibility for transparency, due diligence, and effective communication is now being fairly distributed to all parties within the company, as well as the parties they enter into agreements with.

When running a business, you should be aware of several critical concepts in company governance. The common law rule of constructive notice is one such concept that has significant legal implications for any employer. Understanding this concept is essential for businesses to protect themselves and those involved in contractual agreements with the company from legal complications.

Suggested Read: Types of Directors in Company Law

FAQS

1. How is the doctrine of constructive notice different from the doctrine of Indoor Management?

The doctrine of indoor management is an exception to the rule of constructive notice. It says that as far as the internal proceedings of the company are concerned, it is presumed to have been done correctly.

2. Which of the following documents is known as the doctrine of Constructive notice?

Under the rule of constructive notice, the member, creditor or any person dealing with the company is deemed to know the memorandum and articles of association.

3. What is the limitation of the doctrine of constructive notice?

The doctrine of Constructive notice does not protect the company as far as internal proceedings of the company are concerned. This is also an exception to this rule.

4. What is the effect of the Doctrine of constructive notice?

It prevents an outsider dealing with the company to deny that he did not know that a particular act would render ultra vires or beyond the scope and authority of the company.

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