Introduction
Have you ever wondered how outsiders are expected to know the internal rules of a company?”
The Doctrine of Constructive Notice is a fundamental principle of Company Law that stipulates the expected knowledge of outsiders about the rules of a registered company. This is essentially a legal principle, or legal fiction, whereby it is assumed that the outsider knows certain facts and information in respect of the company, without actual, direct knowledge. In other words, the law presumes that outsiders have: (i) read the Memorandum of Association (MOA) and Articles of Association (AOA) which sets out the objects and internal regulations of that specific company; and (ii) that they have understood them. Therefore, if an outsider contracts with a company in a way that contradicts the MOA and AOA, then, by virtue of Constructive Notice, he may not contend later that he was unaware of the restrictions of the MOA and/or AOA, and therefore cannot escape liability or contractual obligations.
In short, the doctrine primarily protects the company against outsiders because the outsider is bound by the company’s external constitution. Importantly, the strict compliance with Constructive Notice is mitigated by the qualifications of the Doctrine of Indoor Management, which protects outsiders from irregularities in the management of the company.
To understand this better, let’s first explore what this doctrine really means.
Meaning
The concept of constructive notice is a basic legal principle, often referred to as legal fiction, that is, the law assumes that a person is aware of certain facts – or information – even if that person does not have actual, direct knowledge of those facts or information. The doctrine assumes that a reasonable person would know or could have demonstrated reasonable diligence in discovering the information, where the information is either public or otherwise available. For example, in Company Law, anyone who engages in dealings with a company is deemed to have read and understood the publicly filed documents of the company, specifically its Memorandum of Association (MOA) and its Articles of Association (AOA). The principle is based on the maxim Ignorantia juris non excusat (ignorance of the law is no excuse).
The principle helps to ensure that individuals cannot legitimately claim to be unaware of information that was disclosed to the public in order to evade legal liability or contractual obligations. The doctrine is intended to help ensure transparency, and to encourage a duty of diligence in legal or commercial interactions. Ultimately, the doctrine is meant to function in the first instance to provide protect the company against certain outsiders, in that the company is entitled to expect the outsider to be bound to the company based on the company’s external constitution found in the public documents.
Objective or Purpose of Doctrine constructive Notice
The Doctrine of Constructive Notice does not allow outsiders to rely on ignorant claims about a company’s constitution (Memorandum of Association and Articles of Association). Therefore, it imposes an obligation on persons dealing with a company to look at and factor in what the constitution states. Furthermore, it eliminates the debate surrounding whether outsiders have adequately understood the requirements of a company’s constitution.
The objective of the doctrine is to make sure that parties conducting business both understand and utilize the limits of that constitution in a particular commercial transaction.
- Protecting the Integrity of the Company Third parties that enter into a business transaction with any company must take the necessary steps to ensure that the transaction adheres to the company’s status and, in fact, should proceed with these business dealings from a position of strength by verifying key details about those limits beforehand. Businesses must have some reasonable assurance that their dealings with a company can or will not be challenged. This Doctrine seeks to protect that principle so that companies can establish their intellectual property, assets, other appropriate limitations, and plans of action without charity but without dealing with hesitation and threats.
- Protecting Employees from Outsiders The provisions of the Doctrine of Constructive Notice protecct a a company’s employees from external activities or persons seeking to unduly influence or manipulate company decisions, processes, and transactions. The doctrine holds those employees accountable for authority and delegate responsibility for a particular business activity, before acting as agents of the company rather than as employees or officers acting for themselves as individuals.
Important Cases on Doctrine of constructive Notice
- Ernest v. Nicholls (1857)
The case of Ernest v. Nicholls (1857) 6 H.L. Cas. 401 is an important case in English Company Law, as it established the Doctrine of Constructive Notice.
Issue: Was the contract (the deed of transfer) valid and enforceable against the company when an outsider (the Sea Fire Society) could have relied on the directors’ authority, but there had been no internal resolution passed, as required?
Ruling (House of Lords): The House of Lords held the deed of transfer and covenant of indemnity invalid and void because both the deed of transfer and statute had not been complied with, and the directors did not have the requisite authority.
Significance: Doctrine of Constructive Notice. This ruling established the principle that then became the foundation of the Doctrine of Constructive Notice.
The court noted that: “Every joint stock company has its memorandum and articles of association open to all who are minded to have any dealings whatsoever with the company, and it is those who conduct business with them that must be affected with notice of all that is contained in those two documents.” Key takeaway Ernest v. Nicholls is authority for the proposition that the documents to be kept with the Registrar (or similar public).
- Oakbank Oil Co. v. Crum (1882)
The status of Oakbank Oil Co. v. Crum (1882) 8 App Cas 65, in the House of Lords, concerned the correct method of calculating dividends when the shares in the company were fully paid-up and partly paid-up shares. The articles of association of the company indicated that dividends were to be paid to members ‘in proportion to their shares.’ The shareholder had previously declared dividends on paid-up capital (that is, an amount that had been contributed by the shareholder) rather than on the nominal value (or number) of the shares in issue. The House of Lords held that the word ‘shares’ as it appeared in the articles and the Companies Act 1862 was referring to the aliquot parts of capital and meant the nominal amount of shares being held regardless of how much had been paid up. As such, notwithstanding the apparent unfairness of a partly paid shareholder receiving the same dividend as a fully paid shareholder on the same nominal value, the judgment was that dividends must be declared in accordance with the express terms of the articles of association, namely, in proportion to the nominal value of shares.
- Kotla Venkataswamy v. Rammurthy (1934)
The Kotla Venkataswamy v. Chinta Ramamurthy case (1934) of the Madras High Court is significant because it addressed the Doctrine of Constructive Notice in the Indian judicial context. The plaintiff, Kotla Venkataswamy, attempted to enforce a mortgage bond executed by the South Indian Agricultural and Industrial Improvement Co., Ltd. The mortgage bond in question was only signed by the Working Director and Secretary; however, the company’s Articles of Association (AOA) were a publicly filed document, which specified that all deeds and instruments had to be executed by three people: the Managing Director, Secretary, and Working Director. The court declared the mortgage bond to be invalid and void because the Managing Director’s signature was legally required and its omission constituted an illegality on the face of the deed. The court applied the Doctrine of Constructive Notice and presumed that the plaintiff had constructive knowledge, and therefore either knew or should have known, of the contents of the AOA; that the deed was not properly executed. The ruling strongly reiterated the doctrine and reinforced its application, indicating that those who deal with a company have a duty to look at documents submitted to the public to confirm internal authority and legal requirements for valid transactions.
Exception of Doctrine of constructive Notice
The Doctrine of Indoor Management, or the Rule in Turquand’s Case (from Royal British Bank v. Turquand (1856)), is the only and most important exception to the Doctrine of Constructive Notice. The Doctrine of Constructive Notice is a harsh doctrine that requires outsiders to know what all of the external rules of the company are (which are found in the Memorandum and Articles of Association). The Doctrine of Indoor Management presents a counter-balance to it by protecting the outsider from the internal irregularities in the company. This doctrine states that if a person contracts with a company, acts in good faith, and does not suspect anything wrong, the person is entitled to assume that all internal formalities and procedures (i.e., a borrowing of the money must comply with the internal workings of the company) have in fact complied with the public documents (MOA and AOA). If the Articles provide that the board can borrow cash only after a special resolution has been passed by actual members, then the outsider can assume the special resolution was passed without having to check minutes of the company. The doctrine of Indoor Management effectively prevents a company whom has not complied with their own internal procedures argument from escaping liability. The exception was necessary. As Justice Bray put it, “the wheels of business would not go around smoothly, if people dealing with companies were required to diligently or thoroughly investigate internal matters.
Difference between Doctrine of Constructive Notice and Doctrine of Indoor Management.
| Feature | Doctrine of Constructive Notice | Doctrine of Indoor Management |
| Foundation/Origin | Based on the public nature of registration (Ernest v. Nicholls, 1857). | Established as an exception to Constructive Notice (Royal British Bank v. Turquand, 1856). |
| Principle | Presumes an outsider has knowledge of the company’s external documents. | Presumes an outsider does not have knowledge of the company’s internal procedures. |
| Area of Focus | External Matters: Contents of public documents (MOA and AOA). | Internal Matters: Irregularities in the company’s internal management/proceedings. |
| Party Protected | Primarily protects the Company against the claims of the outsider. | Primarily protects the Outsider (Third Party) against the company. |
| Effect on Outsider | Imposes a duty of due diligence (to read the documents). | Relieves the duty of checking internal compliance (assumes compliance). |
| Nature of Knowledge | Deemed/Imputed Knowledge of the company’s public limits and powers. | Entitle d to Assume that all necessary internal steps have been followed. |
| Illustrative Case | Kotla Venkataswamy v. Rammurthy (1934) | Royal British Bank v. Turquand (1856) |
Conclusion
The Doctrine of Constructive Notice is one of the key principles in Company Law and it operates on a legal fiction that an outsider dealing with a company is presumed to know the company’s public documents (MOA and AOA). The doctrine’s primary aim is to protect the company as well as to achieve transparency by imposing a duty of diligence on the outsider to ascertain the company’s external limits and powers. This rigid rule is significantly ameliorated, however, by the Doctrine of Indoor Management (the key exception) which protects the outsider by permitting him to assume that the internal procedures and formalities of the company have been properly adhered to. Both doctrines, which are embodied in cases such as Ernest v. Nicholls and Royal British Bank v. Turquand, create a basis providing, equity for an acceptable balance in the liability and obligations of both companies and third parties in commercial dealings.
About Author
Miss Komal is a law student and corporate enthusiast committed to demystifying the legal hurdles of the business world. Driven by
a fascination with M&A and venture capital, they provide a fresh, student-led perspective on the legal trends shaping
today’s corporate giants.
FAQs on Doctrine of Constructive Notice
Q1. What is the Doctrine of Constructive Notice under Company Law?
A : It is a legal presumption that every person dealing with a company is aware of its public
Documents like MOA and AOA.
Q2. Why is the Doctrine of Constructive Notice important?
A : It ensures that outsiders cannot claim ignorance of the company’s public rules, protecting
the company from fraudulent or negligent dealings.
Q3. What are the exceptions to this doctrine?
A: The primary exception is the Doctrine of Indoor Management, which protects outsiders from
undisclosed internal irregularities.
Q4. What are the main case laws related to this doctrine?
A: Ernest v. Nicholls, Oakbank Oil Co. v. Crum, and Kotla Venkataswamy v. Rammurthy.
Q5. Is the Doctrine of Constructive Notice still relevant today?
A: Yes, though its application is limited by fairness doctrines and corporate good faith
principles.