This Doctrine saves the company from the outsiders.The Doctrine of Constructive Notice in company law holds that anyone dealing with a company is presumed to have knowledge of its Memorandum of Association and Articles of Association. Once these documents are registered, they become public records, accessible to anyone upon payment of a nominal fee.
This means that individuals entering into contracts with a company are deemed to have not only read these documents but also understood their contents. They are presumed to know the company’s powers, the delegation of these powers to directors, and any limitations placed upon their exercise. For example, if the company’s Articles stipulate that a bill of exchange must be signed by two directors to be valid, any person dealing with the company must ensure compliance; failure to do so negates any claim under the bill.
In Griffith v. Paget (1877), it was established that any act outside the company’s powers as outlined in its memorandum or beyond the authority of its directors is invalid, and the individual cannot acquire rights under such a contract. Similarly, in Mohony v. East Holyford Mining Co. (1875), it was reinforced that outsiders are responsible for understanding the company’s constitutional documents before entering into any transaction.
An example of this principle was seen in Kotla Venkataswamy v. Rammurthy (1934), where a deed of mortgage was invalidated because the company’s Articles required signatures from the managing director, secretary, and working director, but only the latter two signed the document. The court ruled that the mortgagee, despite acting in good faith, should have reviewed the Articles beforehand.
The doctrine also applies broadly, as seen in instances like publishing court summons in a newspaper. It is assumed that the public has read such notices, demonstrating the principle of constructive notice.
Although this doctrine holds outsiders accountable to the limitations set by a company’s constitution, it is counterbalanced by the Doctrine of Indoor Management, which shields third parties acting in good faith from being impacted by the company’s internal procedural errors.
As explained in Halsbury’s Laws, the doctrine has practical implications: if a party suspects irregularities but deliberately avoids making inquiries, they will be treated as having knowledge of the irregularity, as established in Jones v. Smith (1841).
Example of the Doctrine of Constructive Notice
Reshma entered into a contract with Zenith Fashions to supply raw materials for garment manufacturing. According to Zenith Fashions’ Articles of Association, any contract over ₹5,00,000 must be signed by both the Managing Director and the Company Secretary.
In this case, the contract was signed only by the Managing Director, and Reshma did not review the company’s Articles of Association to ensure the proper authority had been followed. Later, when Zenith Fashions refused to honor the contract, claiming it was invalid due to the absence of the Company Secretary’s signature, Reshma tried to enforce the agreement.
However, under the Doctrine of Constructive Notice, Reshma is presumed to have knowledge of the company’s Articles of Association. Because she did not check them to ensure compliance with the requirements, she cannot enforce the contract.
This illustrates how the doctrine holds individuals dealing with a company responsible for knowing and adhering to the limits imposed by its constitutional documents.
Also Read- DOCTRINES OF INDOOR MANAGEMENT
ARTICLE WRITTEN BY – Gaddam Sneha Deepthi
EDITOR – Nancy Sharma
