Doctrine of Constructive Notice

When we study Company Law, one of the most important doctrines that come our way is the doctrine of Constructive Notice. The doctrine of Constructive Notice implies that the Article of Association is well-known by the outsider who seeks to hold any relation with the company in the near future because the Article of Association of the Company is a public document and is available to every one according to Section 399 of the Companies Act, 2013.

From the time when the company is registered, the Article of Association and the Memorandum of Association are considered as the ‘public document.’ They are open for inspection by anyone from the general public. It is therefore 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 merely to Memorandum and Articles but also to all the other documents which are required to be registered with the Registrar of Companies. But for the documents that are filed with the registrar of companies for the sake of records only, the doctrine of constructive notice doesn’t apply.[1]

This English doctrine was initially applied to only cases of fraud but was soon thereafter extended to cases of gross negligence also.[2]

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Constructive Notice and Actual Notice

Many times there is confusion between the two terms- Constructive Notice and Actual Notice. A person although may not have actual notice, but he may still have constructive notice. Actual notice is when knowledge of the incident or of any matter was in actually given to that particular person. Whereas on the other hand, constructive notice implies legal notice although an actual notice was never given. But it should be possible that the person would reasonably know about the proceeding under the given circumstance. For example, we often see legal notice being posted in newspapers, etc.

In a case, it was held that anyone who deals with the company is presumed to have not only read its Memorandum of Association and Artice of Association but also properly understood the real meaning of the provisions. Such notice is called Constructive Notice.[3]

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Effect of the Doctrine of Constructive Notice

Under the doctrine of Constructive Notice, it is the outsider. It is burdened with a responsibility to know the documents that guide the company. He should be well aware of all the legal documents before he signs any deal with the company. It is also the responsibility of the third party to understand the real meaning of the provision and terms therein. The doctrine favours corporate bodies.

However, the court had also developed a doctrine subsequently and held that although the third party should have notice of all the contents of the Memorandum and Article, they are not required to inspect the internal matters and see whether the company had complied with all the internal procedure.[4]

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An exception to the Doctrine of Constructive Notice

1. Forgery- in case the company commits fraud anywhere in its Article of Association or the Memorandum of Association, then the outsider would not be bound by the doctrine of the constructive notice.
2. Prior knowledge of the irregularity- if the outsider has any prior knowledge of the irregularity but continues to contract with the company in order to attain some gainful objective then the doctrine of constructive notice will not apply.
3. Negligence- if the outsider commits negligence, the doctrine of Constructive notice does not apply.

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Conclusion

The doctrine of Constructive notice is often quoted as an unreal doctrine. The reason behind this is that the doctrine is created by courts through judicial pronouncements and is an imaginary doctrine. A number of contracts take place between the outsider and the company in a day. The doctrine lays a duty on each and every outsider to have a notice of all the legal documents of the company. This is done for the smooth and effective functioning of the corporate world.

Read Also – Doctrine of Estoppel

From the time the doctrine was established, it has been evolved greatly, and we saw the emergence of another important doctrine, that is the doctrine of Indoor Management. It implies that all the internal functioning of the company remains its private matter, and the outsider need not inquire as to whether the company is functioning according to its Memorandum and Article.

Citation-

[1] According to the Companies Act, 2013 Section 299.

[2] West v. Reid (1843) 2 Hare 249.

[3] Oakbank Oil Co. v. Crum (1882) 8 A.C. 65.

[4] Royal British bank v. Turquand (1856) 6 E&B 327.