Study Notes: Doctrine of Constructive Notice

Introduction

The doctrine of constructive notice establishes a presumption of knowledge regarding certain facts, the doctrine of constructive notice is often associated with the legal maxim “ignorance of the law is no excuse.” This doctrine, imputes knowledge of certain facts to a party, even if they do not have actual knowledge of those facts. It is commonly applied in property law and company law, where individuals are deemed to have knowledge of certain information that they could have reasonably discovered through proper diligence or inspection.

For example, in the context of constructive notice, if a person claims ignorance of a particular legal requirement related to a property or a company transaction, they may not be excused from the consequences if that requirement was something they could have reasonably discovered through proper diligence or if it is a well-established legal principle.

In the context of company law, particularly under the Companies Act 2013 (in India), the doctrine of constructive notice primarily concerns the constructive notice of the company’s constitutional documents, memorandum and articles of association, as well as public records available for inspection.

Under Section 399 of the Companies Act 2013[1], every person dealing with a company is deemed to have constructive notice of the company’s constitutional documents, memorandum, and articles of association. This means that anyone entering into a transaction with a company is presumed to know the contents of its memorandum and articles, regardless of whether they have actually read them. Furthermore, Section 399 also states that the company’s memorandum and articles must be open for inspection by the public. This section confers the right of inspection to all. Therefore, anyone dealing with the company is expected to have inspected these documents or could have inspected them if they desired to do so.

In Oakbank Oil Co. v. Crum[2], it was ruled that everyone who interacts with the company is presumed to have not only read the company’s MOA and AOA but also fully understand its actual meaning. Constructive Notice is the name for this sort of notice.

The doctrine of constructive notice serves to promote transparency and accountability in corporate dealings by ensuring that parties are aware of the fundamental rules and regulations governing the company with which they are transacting. It prevents individuals from claiming ignorance of important information that could have been discovered through reasonable diligence or inspection of public records. Basically, this doctrine works in the favour of companies.

Object of The Doctrine of Constructive Notice

• Protection of Third Parties: It aims to safeguard the interests of third parties involved in legal transactions. By imputing knowledge, it ensures that parties cannot claim ignorance of information that is publicly available or should have been reasonably discovered through due diligence.
• Legal Certainty: The doctrine of constructive notice contributes to legal certainty by establishing a standard of presumed knowledge. It provides a framework for determining the rights and obligations of parties in transactions, ensuring that relevant information is considered in legal proceedings.
• Encouragement of Due Diligence: It encourages parties to exercise reasonable diligence when engaging in legal transactions. It emphasizes the importance of conducting appropriate inquiries and inspections to gather relevant information and make informed decisions.
• Prevention of Fraud and Abuse: The doctrine of constructive notice acts as a deterrent against fraudulent or deceptive practices. It discourages parties from feigning ignorance of information that could impact the rights and interests of others, promoting fairness and discouraging misconduct.
• Efficiency and Reliability in Transactions: By imputing knowledge, the doctrine of constructive notice promotes efficiency and reliability in legal transactions. It reduces the need for extensive investigation into the actual awareness of parties and allows for the efficient resolution of disputes based on presumed knowledge.

Understanding The Doctrine in Light of Case – Kotla Venkataswamy vs. Chinta Rammurthy and Ors[3]

It was stated in the company’s papers that the signatures of the managing director, working director, and company secretary were required in order to mortgage the firm’s property. A contract is not legally binding on the firm until all three signatures are present, as stated in the articles of incorporation.

But in this instance, the mortgaged deed given to the plaintiff lacked the managing director’s signature. As a result, during the company’s winding up, the issue of whether the mortgage deed was enforceable or not arose when the mortgagee claimed the company’s property. The responder claimed that he was unaware that a contract required three signatures in order to be enforceable.

The court held that the mortgage deed was invalid and further held that parties interacting with the corporation are presumed to be aware of the terms of its AOA and MOA, thus a defense of ignorance is not available.

Doctrine of Constructive Notice and Actual Notice

The doctrine of constructive notice and actual notice are both concepts in company law that deal with knowledge imputed to parties dealing with a company, but they differ in their nature and how knowledge is acquired.

In Constructive Notice knowledge is imputed to parties based on what they should have known or discovered through reasonable diligence or access to public records. It doesn’t require direct communication or personal awareness but in Actual Notice, Knowledge is acquired through direct communication or personal awareness of specific facts or information. It involves explicit awareness or notification. Actual Notice is provided in the ‘written form’. They are, preferably, written with the help of paper and ink. These kinds of notices are sent to individuals or institutions to get them to know about the enclosed information.

The Doctrine of Indoor Management an Exception to the Doctrine of Constructive Notice

The doctrine of indoor management acts as an exception to the doctrine of constructive notice. While constructive notice imputes knowledge to parties regarding the external constitution of the company (e.g., its memorandum and articles), the doctrine of indoor management protects parties who rely on the apparent authority of company officers. If a third party enters into a transaction with a company based on the representations or actions of its officers, and it turns out that the officers exceeded their authority or did not follow internal procedures, the third party may still be protected under the doctrine of indoor management, even if they did not conduct any further inquiries into the company’s internal affairs.

The doctrine of Indoor management restricts external parties from having access to information or awareness of a company’s internal affairs. Consequently, if a particular action is sanctioned by the company’s MOA or AOA, external parties may reasonably assume that all necessary formalities have been diligently followed while executing that action.[4] The principle of Indoor Management means that a company is responsible for its own internal affairs. This legal principle, commonly referred to as the Doctrine of Indoor Management or the Turquand Rule originated from a significant case of Royal British Bank v. Turquand (1856)[5].

The case of Royal British Bank v. Turquand (1856) is a landmark case that established the doctrine of indoor management, also known as the Turquand Rule, in company law. This doctrine provides protection to third parties dealing with a company who reasonably rely on the authority of the company’s officers, despite any irregularities in the company’s internal affairs.

In Dey v. Pullinger Engg Co.[6], Justice Bray stated “The wheels of business would not run smoothly if people engaging with businesses were required to thoroughly inspect a company’s internal equipment to ensure that nothing was wrong.”

Exceptions to the Doctrine of Indoor Management

1. Actual Knowledge of Irregularities or Suspicion of Irregularities:

The doctrine of indoor management may not protect a third party if they have actual knowledge or suspicion of irregularities in the company’s internal affairs. If a third party is aware of facts or suspicion that would put a reasonable person on notice that the company’s officers are acting outside their authority or in violation of internal procedures, they cannot rely on the doctrine to shield themselves from liability.

1. Collusion, Forgery or Fraud:

The doctrine of indoor management does not protect third parties who collude with company officers to perpetrate fraud or deceive other parties. If a third party knowingly participates in fraudulent activities or assists company officers in breaching their duties, they cannot invoke the doctrine to escape liability.

1. Ultra Vires Acts:

The doctrine of indoor management generally applies to acts performed within the apparent authority of company officers. However, it may not protect third parties if the act in question is clearly beyond the company’s legal powers (ultra vires). If the act is ultra vires, meaning it falls outside the company’s objects or powers as stated in its constitution, the doctrine may not shield the third party from liability.

1. Void or Voidable Acts:

The doctrine of indoor management may not protect third parties in cases where the act they rely on is void or voidable due to legal defects such as illegality, lack of capacity, or non-compliance with mandatory legal requirements. If the act is inherently invalid, the third party cannot use the doctrine to validate it.

Difference Between the Doctrine of Indoor Management and Constructive Notice

Doctrine of Constructive Notice in Terms of Property Law

In property law, the doctrine of constructive notice operates as a legal principle that imputes knowledge of certain facts to individuals based on what they should have known or discovered through reasonable diligence or inquiry. Under the doctrine of constructive notice, individuals are presumed to have knowledge of certain facts or conditions that would have been discovered through reasonable investigation or inquiry. This presumption of knowledge is based on the principle that individuals are expected to exercise due diligence when dealing with property transactions.

Constructive notice often applies to information contained in public records or legal documents related to property, such as deeds, mortgages, liens, easements, and zoning regulations. Individuals involved in property transactions are generally deemed to have constructive notice of the contents of these documents, even if they have not actually reviewed them.

The doctrine of constructive notice serves to protect the interests of innocent purchasers by encouraging them to conduct thorough investigations and inquiries before completing a property transaction. It prevents parties from claiming ignorance of important information that could have been discovered through reasonable diligence.

[1] Section 399 of the Companies Act, 2013.

[2] (1882) 8 A.C. 65.

[3] AIR 1934 Mad 579.

[4] Ibid.

[5] (1856) 6 E&B 327.

[6] (1921) 1 KB 77.