DOCTRINE OF CONSTRUCTIVE NOTICE - AN OVERVIEW

 

DOCTRINE OF CONSTRUCTIVE NOTICE – AN OVERVIEW:

 

1. INTRODUCTION:

 

Constructive notice refers that to presume something is known. The law sometimes presumes that a person knows something even though they do not. The doctrine of constructive notice is the principle of presumption of the knowledge of a particular subject or information in the eyes of law. As we all know notice is an alert or a kind of information which is being given or informed to the person or the group or persons thereby. The notices served either to public at large or to end individual person.

 

A constructive notice maybe defines to be the knowledge of a fact or facts which the law imputes to a person and in respect to which all questions of actual knowledge thereof excluded. The Indian Contract Act, 1872, defines it as ‘a person is deemed to have actual knowledge of the fact if he or she willingly abstains from acquiring the knowledge or is grossly negligent’.

 

In other words, having constructive notice of something means that if there is no actual knowledge of the facts, it is determined by law that such knowledge is there. It is a notice which treats a person who ought to have known a fact as if he actually knows it. A person has constructive notice of all the facts of which, he would acquire actual notice, had he made those inquiries which he ought reasonably to have made. Constructive notice has roughly been defined as knowledge which the court imputes to a person upon a presumption so strong that it cannot be rebutted that the knowledge must be obtained. Not having knowledge of such things cannot be taken as defense in the court. When we study company law, one of the most important principles of that come in our way is the doctrine of Constructive Notice.

The doctrine of Constructive Notice implies that the Memorandum of Associations and Articles of Associations are notable by an outsider who seeks to hold any relation with the company in the near future because the Memorandum of Associations and the Articles of Associations are the public documents and are available to each and every one as per the Companies Act, 2013. From the time when the company is registered then the Memorandum of Associations and the Articles of Associations are considered as the public document, and they are open to all for inspection by anyone from the general public. Hence, it is presumed that any person who is dealing with the company is well equipped by its rules and regulations.

 

The rule of constructive notice extends not only to Memorandum of Associations Articles of Associations but also to all the other documents which are required to be registered with the Registrar of Companies. The law recognized a company as an artificial person, which means it has been given some status of a legal person. It is governed by its own constitution and framework which lays down the powers, objectives, and functions of the company along with the nature of its business. The set of these documents are respectively called Memorandum of Associations and Articles of Associations. Since a company needs to get these documents registered to get its certificate of incorporation, the memorandum of associations and articles of associations are public documents which are accessible to the public either without any cost or on payment of a nominal amount. A person dealing with the company is duty-bound to read, understand and inspect these documents to ensure that its contract is in congruence with the provisions of the company. The person is deemed to have understood the documents as per the meaning in manner they are to be interpreted. This includes an understanding of the powers of the company, its directors and officers and the extent of those powers. This assumption that the person dealing with the company has the notice of the contents of the memorandum of associations and the articles of association is known as the constructive notice.

 

Consequently, if a person enters into a contract which was against the memorandum, or beyond the powers which have been conferred on the directors in the Articles of Association, then the contract is void and cannot enforced by the person even if he or she had acted in good faith and the money was utilized to achieve the objective of the company, as given in its memorandum. In law it is already been told that some information you have been gone through which is being presumed that you have the knowledge of that particular information.

 

In the Indian Contract Act, 1872, there was a late in Maxim “ignorantia juris non exqusat”, which means ignorance of law is not an excuse and it is presumed that you have the knowledge of law. It is, therefore, the person’s, dealing with the company, duty to inspect each and every document and statement of the company to know well about the company's preferences or the capacity of contracting in which deal they can contract or in which they cannot. As stated earlier, the articles and memorandum of associations when registered, become a public document, therefore, anyone whether a member or an outsider, who has dealings with the company, shall be deemed to have notice of the contents of these documents. This is known as the doctrine of constructive notice which prevents the third party, that is, the outsider from saying that he did not know that the articles or memorandum of Association of the company rendered a particular act or delegation of authority ultra vires the company. The public or persons are expected to go through the contents of memorandum and articles before entering into transactions with the company. These documents are available in Registrar’s office, and copy thereof may be obtained without any cost or on payment of prescribed fee. In short, once the memorandum and articles are registered in the office of the Registrar of Companies, all the persons who deal with the company shall be presumed to have constructive notice of the contents thereof.

 

2. ORIGIN AND HISTORY OF THE DOCTRINE O CONSTRUCTIVE NOTICE:

 

The doctrine of constructive notice was first propounded in the year 1850 under the English Law with respect to Deed of Settlement, which discussed that if a person is dealing with a company; it would be deemed that such person has notice of that company’s registered constitutional documents. In furtherance to this, such notice also included that the person would be deemed to have also understood the provisions of these documents. Though the ambit of constructive notice included the articles and the memorandum of association, but also special resolutions, it did not cover matters filed by a company to disclose the financial and other information, in order to assist the shareholder to make an informed judgment. So, the scope of this doctrine remained uncertain. This is a common law doctrine and applicable in England as well as in India, on same lines. The corporate law jurisprudence is somewhat similar throughout the globe; therefore, the principles of the corporate world are followed almost everywhere. This principle also has been adopted by the courts of many countries. The doctrine of constructive notice is one of the basic postulates of corporate law. Even though the principle originated from the common law, is no longer a part of the English Corporate Laws.

 

Nevertheless, the doctrine of constructive notice is still a part of the Indian Laws. It is not in its original form but remains, in essence, the same doctrine. The doctrine of constructive notice was established by the House of Lords in the case of Ernest v. Nicholls, (1857) 6 HLC 401 (Eng.), where it was held for the first time that any person who is dealing with the company is deemed to be familiar with the contents of all the public documents of the company. It was further explained in the case of Mohony v. East Holyfold Mining Co.

 

3. DOCTRINE OF CONSTRUCTIVE NOTICE UNDER THE TRANSFER OF PROPERTY ACT:

 

The doctrine can be better understood by explaining the provisions, provided under the Transfer of Property Act, 1882, relating to the doctrine of constructive notice.

 

So, as per the provision of Section-3 of the Transfer of Property Act, 1882, doctrine of constructive notice is based on Equity. Where a person actually does not know anything about a fact but the court treats that under the circumstances, he must be deemed to have knowledge of that fact, the notice is constructive.

 

 

There are certain circumstances in which the court presumes that under those circumstances a person should be taken to have knowledge of that fact. The circumstances are of such a nature that the Courts of law would construe or presume that the person concerned is bound to know that fact. He cannot say that he has no express or actual notice of the fact. This is called presumption by the Courts or legal presumption. Legal presumptions cannot be denied or controverted. Constructive notice is a legal presumption and is like a provision of law the knowledge (notice) of which cannot be denied by any person. It is a matter of law which cannot be rebutted or disproved.

 

In Plumb v. Fluitt, observed that, “Constructive Notice I take to be in its nature no more than evidence of notice, the presumptions of which are so violent that the Court will not allow even of its being controverted”.

 

Constructive notice is, therefore, imputed to or imposed upon a person under legal presumptions. The legal presumption of constructive is made by the following circumstances, -

 

Wilful Abstention from an inquiry or search

 

Wilful abstention from an inquiry or search means deliberately avoiding to take notice of a fact which a reasonable man would have taken in the normal course of life. If a person refuses to accept a registered envelope addressed to him, it is his wilful abstention from taking notice of the contents of that envelop. In such a situation the law presumes that he must have knowledge that the contents of the letter are against his interest and because of this reason he is avoiding to accept that letter.

 

In A.E.K. Kaliappa Nadar v. S.V.K.R. Amrithavala Vandammal, the Hon’ble Supreme Court has held that a person who refuses to take a registered letter shall be imputed with constructive notice of its contents and he cannot take the plea that he does not know its contents.

 

Gross-Negligence

 

Negligence means carelessness. Mere negligence or ordinary carelessness in taking notice of a fact is not gross-negligence. There is no constructive notice in simply being negligent to take notice of a fact. But, if the negligence is so grave or gross that a man of common prudence can never be expected to do, the negligence is gross. Gross negligence is blameworthy under the law and is never excused.

 

Registration as Notice

 

Explanation-I to Section-3 of the Act, provides that registration of a document is notice of all the facts stated in that registration document is notice of all the facts stated in the document. Where a document has been registered, it is presumed that all the persons concerned have constructive notice of the material facts affecting the property which are apparent in the deed or which can be reasonably referred from its contents.

 

Notice to an Agent is Notice to Principal

 

Notice or knowledge of a fact to any agent amounts to constructive notice to his principal. The principal cannot deny that the notice of the fact was to agent and not to him. That rule that a principle was bound constructively with notice of certain facts to his agent was added in Section-3 by Explanation-III under the Amending Act, 1929. Notice to an agent is also called an imputed notice.

 

By the above discussion of the doctrine of constructive notice under the provisions of the Transfer of Property Act, 1882, we can say that the application of constructive notice in transfer of property is of the same effect as in case of the corporate management in Company Law. And the doctrine has a strict application and effectuation under both the Law.

 

4. POSITION OF THE DOCTRINE OF CONSTRUCTIVE NOTICE IN U.K:

 

Constructive notice is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. Section-9, of the European Communities Act, 1972, contained the provisions of Constructive Notice, which has now abrogated. The provisions of Section-9 were incorporated in Section-35, of the UK Companies Act,1985.

In TCB Ltd v. Gray, the impact of the new provisions has been provided, where a debenture issued by a company was signed by a solicitor as attorney director of the company, but not by the director personally. The articles of the Company provided that “every instrument to which the seal shall be affixed shall be signed by a director”. Even so the company was held liable. Stating the effect of the new provision, the Court said that before this enactment came into force a person dealing with the company was required to look at the memorandum and articles of the company to satisfy himself that the transaction was within the corporate capacity, but Section-9(1), had changed this. The sub-section said that good faith is to be presumed and that the person dealing with the company is not bound to inquire. The expression “a person dealing with a company” has been held not to include a shareholder allottee.

 

A person who dealt with the company was at common law deemed to have notice of the contents of its memorandum and articles of Association when the company’s certificate of incorporation Was issued by the register of companies and such a person also had constructive notice of the other documents which companies were required to deliver to the Registrar of Companies, provided they were open to public inspection and had been Gazetted where necessary. This is no longer, since an amendment was made in 1989 to the Companies Act, 1985, providing that a person shall not be taken to have notice of any matter merely because it is disclosed in a document delivered to the Registrar of Companies, and so available to public inspection. The statutorily modified circumstances, mean that a person will be treated as a being aware of the contents of certain documents filled in respect of the company with which he deals.

 

5. THE APPLICATION OF THE DOCTRINE IN INDIA UNDER INDIAN COMPANY LAW:

 

The memorandum and articles of association of every company are registered with the Registrar of companies. The office of the Registrar is a public office and consequently the memorandum and articles become public documents. They are open and accessible to all.

 

It is, therefore, the duty of every person dealing with a company or to inspect its public documents and make sure that his contract is in conformity with their provisions. But whether a person actually reads them or not, ‘he is to be in the same position as if he read them’. He will be presumed to know the contents of those documents. This kind of presumed no notice is called constructive notice.

 

Section-399, of the Companies Act, 2013, expressly granted the provisions for the right of inspection.

 

As per Section-399 of the Companies Act, 2013, any person can inspect any documents by electronic means kept by the Registrar of Companies and accordance with the prescribed Rules. Concerns were raised by corporate India as key decisions were being made publicly available. The rule of constructive notice extends not merely to memorandum and articles but also to all other documents which are required to be registered with the Registrar of Companies for the sake of records only. Since the early times, the Indian courts have shown a certain degree of caution and reluctance in applying this doctrine to the detriment of the third party.

 

The first application of the doctrine of constructive notice by the Indian court was in Charnock Collieries Co. Ltd. v. Bholanath Dhar, the Judge in this case simply holds that the stranger to the company has an obligation to read the articles of the company, but nothing beyond.

 

However, the mode of application is typically the position before the Kreditbank’s Case and the Houghton’s Case in the common law. The judge in these cases simply holds that the stranger has an obligation to the articles of the company, but nothing beyond. Since the articles of the company give the borrowing power to managing agents along with providing security on the company, the Judge holds that the company is bound by the agent’s acts.

 

At earlier, the Court in

 

Mufassil Bank Ltd. v. Molvi Subhan Ullah & Others, held that so long as the power of delegation exists in the articles and the act of the agent is not hit by the doctrine of ultra vires, the company is estopped from denying its obligations under the contract in question. The same was continued in other cases.

The first negative application of the doctrine of constructive notice is found in the case, by the Indian court,

 

In, Kotla Venkataswamy v. Chinta Ramamurthy, it shows the practical effects of this rule. In this case, the articles of association of a company required that all deeds etc., should be signed by the managing director, the secretary and are working director on behalf of the company. The plaintiff accepted a deed of mortgage executed by the secretary and a working director only. It was held at the plaintiff could not claim under this date. The court observed: “If the plaintiff had consulted the articles, she would have discovered that a deed such as the she took required execution by three specified officers of the company and she would have refrained from accepting a deed inadequately signed. Notwithstanding, therefore, she may have acted in good faith and her money may have been applied to the purposes of the company, the bond is nevertheless invalid”.

 

In Griffith v. Paget, the court held that it is presumed that individual dealing with the company have not only read these documents but that they have also understood their proper meaning.

 

In Oakbank Oil Co. v. Crum, the court held that anyone who is dealing with the company shall be presumed to have read and understood the memorandum and the articles of association of the company.

 

In Re Jon Beauforte (London) Ltd., case, an insolvent company’s objects were to manufacture dresses but the company was manufacturing veneered panels. The knowledge of this development was with the creditors. Therefore, in the insolvency proceedings, their claim was not carried out for being ultra virus for the company and a constructive notice to the creditors.

 

In TCB Ltd. v. Gray, it has been held that, persons dealing with the company should check with the Registrar of Companies who its directors, managers and secretaries are at any given time.

 

A. Merits of the Doctrine of Constructive Notice in favour of the Company:

 

The rule doctrine of constructive notice provides the following merits in favour of the company,

 

1. Rule Constructive Notice Provides Protection to the Company:

 

The application of the doctrine of constructive notice in the corporate management provides the protection to the company against the outsider. Even, if the outsider, acted in good faith, he still cannot bring any claim against the company, where the outsider is presumed to have the constructive notice. It provides the security to the companies while they are dealing with the outsiders.

 

2. Constructive Notice Confined to the External Position and Affairs of the Company:

 

The doctrine of constructive notice can only be applied in case of the external matter affairs of the company and not in the internal affairs of the company, no matter if the company is carrying out any ultra virus or fraudulent acts in the sphere of its internal affairs.

 

3. Memorandum and Articles of Association are Public Documents:

 

The doctrine of constructive notice refers to be a kind of presumption that an outsider, dealing with the company, has gone through the contents of the memorandum and the articles of association, even he if he had not read them. And the memorandum and the articles of Association are the public documents, which are open and accessible to all.

 

B. Effect of the Doctrine of Constructive Notice:

 

1. The effect of the doctrine of constructive notice is harsh on the outsider of the company. It is, therefore, the duty of every person dealing with a company to inspect its public documents, and make sure that his contract is in conformity with, their provisions.

 

2. One of the effects of the doctrine of constructive notice is that a person dealing with the company is considered not only to have read those documents but to have understand them according to their proper meaning. He is presumed to have understood not merely the company’s powers but also those of its officers.

 

Though the courts in India, after a period, do not seem to have taken the rule of constructive notice seriously.

 

For example, in Dehra Dun Mussoirie Electric Tramway Co. Ltd. v. Jagmandar Das, the articles of the company expressly provided that the directors or could delegate all their powers except the power to borrow. Even so an overdraft taken by the managing agents without approval of the board was held to be binding, the court saying that such temporary loans must be kept outside the purview of the relevant provision.

 

6. CRITICISM OF THE DOCTRINE OF CONSTRUCTIVE NOTICE:

 

The rule of constructive notice has proved too inconvenient for business transaction, particularly where the directors or other officers of the company where empowered under the articles to exercise certain powers subject only to certain prior approvals or sanctions of the shareholders. Where those sanctions and approvals had actually been obtained or not could not be an ascertained because in real situations, the investors, vendors, creditors and other outsiders could not dare to ask the directors in so many words about those sanctions having been obtained or to produce the relevant resolutions. Since, there are no means to ascertain whether necessary sanctions and approvals have been obtained before a certain officer exercises his powers which, as per articles, can only be exercised subject to certain approvals, those dealing with the company can assume that if the directors or other officers are entering into those transactions, they would have obtained the necessary sanctions. This is known as the “doctrine of Indoor Management” and was originated and first laid down in the case of

 

Royal British Bank v. Turquand,

 

The two main criticisms of the doctrine of constructive notice are:

 

1. The Doctrine of Constructive Notice is a Threat to the Outsiders:

 

The constructive notice prevents outsiders from suing the company with grounds of not understanding the company’s powers and positions. It prevents the outsider from alleging the company, that he did not know that what the constitution of the company rendered. The doctrine itself creates an unfavorable climate for business as it creates a disproportionate burden on part of the third party, which was, in turn, impeding smooth trading. The perception of the doctrine is strongly criticized, unanimously by various jurist as well as writers. It is not at all a logical chain of reason that, because they law gave everyone the opportunity to find out about a company’s registered documents, there was a corresponding duty on part of the third party to peruse through these documents. Even before the Limited Liability of company was came into existence, the doctrine of constructive notice had the potential of creating an unnecessary risk in the minds of the third party.

 

However, this provision was seen to be doing more wrong than good, thereby; its credibility was getting reduced.

 

2. The Doctrine of Constructive Notice is based on Negative Concept:

 

The doctrine of constructive notice is fully based on and originated from a negative concept. A person dealing with the company is duty bound to read, understand and inspect the documents of memorandum and articles of association of the company, to ensure that its contract is in congruence with the provisions of the company. Otherwise, such person cannot bring any action, against the company, regarding any dealing made with the company, which was made in contravention to the memorandum or article of association of the company.

 

7. CONCLUSION:

 

It can be seen that the rule of constructive notice has drastic impacts on the on the corporate world and mainly on the investors. The courts are bound to apply this doctrine even if that equals to injustice for the persons involved. There are no means to ascertain whether necessary sanctions and approvals have been obtained before a certain officer’s exercises his power, which, as per articles can only be exercised subject to certain approvals. Therefore, to mitigate such a situation, those dealings with the company assume that if the directors entering into those transactions, they would have obtained the necessary sanctions, this is known as the doctrine of indoor management. The doctrine of Constructive Notice has been needlessly complicated. The problem that the doctrine aims to resolve could have easily been resolved by a simple application of the rule of ostensible authority which has been elaborated and disguised under this doctrine. The approach of Constructive Notice is so radically inclined to support the Company that the reactions to it all came to support the third parties. The rule of Constructive Notice blindly supports the company to an illimitable extent.