English Notes

DOCTRINES UNDER COMPANY LAW

The enactment of doctrine is to provide protection to the company, its management as well as outsiders engaged in the company

This Article is written by Madhvi  student of UILS, Panjab University. CHANDIGARH.

A company is recognized as an artificial person and has a legal status. It is governed by certain rules and regulations. The Memorandum of Association (MOA) and Articles of Association (AOA) provide for the company’s own framework and constitution which lays down objectives, functions of the company along with the nature of business of the company. The objective behind enactment of doctrine is to provide protection to the company, its management as well as outsiders engaged in the company anyhow.

DOCTRINE OF ULTRA VIRES

MEANING

It is made up of Latin terms, ‘Ultra’ means beyond and ‘Vires’ means power or authority. It can be said that any act done by the company outside its scope or legal power is ultra vires.

The doctrine of ultra vires is a primary rule of company law. It states that objects of the company, as specified in its MOA, can be departed only to the point allowed by the Act, when a company uses its powers to promote any of its objectives specified within the MOA, it is intra vires. Any other act of the company outside the scope of object clauses of MOA is ultra vires.

ORIGIN

This rule has been emphatically laid down by the House of Lords in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche. The House held, any act that is ultra vires cannot be ratified even by agreed consent of shareholders.

The doctrine required elucidation, guiding principle as to how this doctrine will be applied. Almost after a span of five years, in a case held that the rule must be “reasonably understood and applied”. Earliest case to adopt this doctrine was the case Jahangir R. Modi v. Shamji Ladha in 1866.

Another case that helped in shaping doctrine in India is Dr. Lakshmanaswamy Mudaliar v. LIC. The Apex Court held that, a company cannot act beyond its scope as prescribed in MOA, it is prohibited to do. If done otherwise, it would be ultra vires, voidand cannot be ratified.

Further, in National Provincial Bank v. Introductions Ltd, the Court held that, if a bank provides loan to a company for a purpose outside the scope of MOA, it cannot be recovered, as if then falls in scope of doctrine and is void.

LEGAL PROVISION

Section 4(1)(c) of the Companies Act, 2013, requires the company to enlist the objects and matters it considers necessary for furtherance of incorporation should be stated in MOA.

Whereas Section 245(1)(b) of the Act, gives right to members to approach the tribunal in case they believe the conduct of the company is prejudicial to the company and its members.

TYPES OF ULTRA VIRES ACT AND RATIFICATION

  • Ultra Vires to the Companies Act – These acts are void ab initio and cannot be ratified in any situation
  • Ultra Vires to MOA of the company – If a part of an act which is within the scope of MOA and beyond the scope can be separated, only part that is beyond scope will be ultra v if it cannot be separated the whole act will be void ab initio .
  • Ultra Vires to Director intra vires to company – These can be ratified
  • Ultra Vires to AOA but intra vires to MOA – These acts can be ratified by the shareholder (even retrospectively) by making alteration to the articles.

EXCEPTION

The following are also exception along with the above acts which could be ratified :

  • There are certain acts under Company Law that are not explicitly mentioned in MOA but impliedly within the power of company and cannot be said to be ultra vires.
  • The consequences which are subsidiary to the concerned act will not be void unless expressly prohibited by Companies A
  • If a company acquired a property through ultra vires act, it will continue to acquire rights over that property.

EFFECTS

  • Void ab Initio – These acts are null and void from beginning. it is not binding on the company and neither the company can sue nor be sued for such acts .
  • Estoppels cannot convert an ultra vires act into an intra vires act.
  • Injunction – If there is a possibility of the company undertaking an ultra vires, the members can restrain it by getting an injunction
  • Personal liability of Directors – If directors make ultra vires payment, he can be compelled to refund money to the company as he is personally liable. Criminal action can be taken for fraud.

 

DOCTRINE OF CONSTRUCTIVE NOTICE 

MEANING

The term Constructive Notice is based on the term constructive which means something which can be deduced by supposition, a piece of information that was perceptible and must have been acknowledged to the party. Therefore, a constructive notice shall mean such facts that are expected to be known to a person by virtue of some inference.

The MOA and AOA are two documents which are required to be registered with the ROC at the time of incorporation. The offices of Registrar are the public offices, hence these documents become public documents.

ORIGIN

This doctrine was propounded in the 1850s under the English law, in respect of the deed of settlement which confer when someone is dealing with a company, it would be deemed that the person was aware of the company’s registered document and he has understood all the provisions of it. Even though the doctrine was propounded by common law, it is no longer part of English Corporate Law. However, it is still a part of Indian laws, though not in original form but yet in essence.

LEGAL PROVISION

Section 398 of Companies Act, 2013 mandates the registrar to inspect all the documents used for incorporation. Section 398(2) of Act states that the government may frame schemes to make these documents available in electronic forms. Section 399 of the Act is the basis of this doctrine which expressly guarantees the right to access, inspect and make record of these documents available with the registrar upon payment of nominal charges.

Person entering into a contract with a company is required to know about guidelines of the company as these are available in public domain. Whether a person has read these terms or not, law still assumes them to be responsive to it as these documents are accessible to the general public.

In other words, one is presumed to have knowledge about the contents of these documents and to have understood them in proper meaning. This is known as the doctrine of constructive notice.

EFFECTS OF THE DOCTRINE

The following are the practical effects

  • One who deals with the company is deemed to be familiar with the contents of the public documents whether he has seen it or not.
  • A person dealing with a company who is deemed to have notice is also presumed to have understood those documents.
  • This doctrine stops a person from contending that had no knowledge of the content of the document , in a way it is a negative

CASE LAWS

  • Kotla Venkaswamy v. Chinta Ramamurthy

In this case, as per the AOA, company documents were to be signed by 3 people. The Plaintiff accepted the mortgage deed signed by 2 members only. Later the company chose to be liquidated and sold property.

The Court while deciding upheld the mortgage and stated though the mortgage deed was invalid, the plaintiff cannot claim under this as documents were in public domain, the Court presumed the plaintiff had read before dealing with the company. This case is correlated with constructive notice. The company was not held liable in this case.

  • Rama Corporation v. Proved Tin and General Investment Co.

The clause under AOA of defendant company stated, the director to whom power has been delegated by board can only collect cheque on behalf of company, the plaintiff company was unaware of this. The plaintiff company formed an agreement with the defendant company for subscription of funds to be used for financing of sale of goods of third company.

The Court decided while applying the doctrine of constructive notice that the defendant company was not bound by agreement.

CRITICISM

This doctrine has proven to be inconvenient as it lays down responsibility on an outsider to be well versed with all the documents of the company it is dealing with. Practically, the view point of this doctrine is improbable as a company is acknowledged through its workers and not by documents.

The doctrine of indoor management is a partial exception to this rule.

DOCTRINE OF INDOOR MANAGEMENT

MEANING

The principle of constructive notice seeks to protect the company against the outsiders whereas the doctrine of indoor management seeks to protect outsiders against the company.

This doctrine highlights that an outsider entering in contract with a company, he is deemed to have read the MOA and AOA of the company, he can have presumption that there are no irregularities in internal matters of the company. He is not bound to inquire into the internal functioning of the company. If his contract is consistent with terms of public documents, the company is bound and  he will not be affected by irregularity in internal affairs of the company. Government authorities are also within purview of this doctrine.

ORIGIN

This doctrine was pronounced in Royal British Bank v. Turquand, also known as the Rule of Turquand. The company borrowed money against the bonds, which was to be approved by an AOA of the company provided it was passed by special resolution in the general meeting. The director gave bonds to Turquand without authority of resolution.

It was held that Turquand could sue the company as he was entitled to assume that bonds were issued by passing necessary resolutions.

Indoor Management means, a person transacting business with company is entitled to assume everything provided in public documents regarding internal functioning of company has been duly met.

The Lakshmi Ratan Cotton Mills  Co. Ltd v. J.K. Jute Mills Co. Ltd, case relates to non-payment of loan. The standpoint of Turquand’s case was followed and the Court stated, if any negotiations occur on behalf of the company, it is implicit that all the internal  provisions have been met with. It was held that company cannot be expected to have information of internal rule of debtor company, the only facet they need to look for is the person approaching on behalf of company is authorized

EXCEPTION

  • Knowledge of Irregularity:

Where a person dealing with the company has actual knowledge of internal irregularity of the company he is not entitled to claim protection of this doctrine because he could have taken measures for self protection.

 In this case, T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd., two companies engaged in mortgage of assets. The AOA of the company provided for the process to be observed for such transactions. Both companies had the same director. The Court held that the lender was conscious of such irregularity hence, the contract is not binding.

  • Acts outside apparent authority:

If an officer of a company makes a contract with an outsider and if the act of the officer falls outside the apparent authority, then the company is not bound.

In Anand Behari Lal v. Dinshaw, the transfer of property was accepted by the plaintiff from its accountant. The act was  clearly beyond the scope of accountants authority; it was held void. The delegation clause could not have validated it unless it was authorized.

  • Forgery:

In the case of Ruben v. Great Fingall Consolidated, the company secretary forged the signature of directors and sold the shares. It was held that a company cannot be made responsible where there has been fraud and forgery.

  • Representation through articles:

The AOA of a company allows delegation of power and the person  entering in business with a company may presume that person claiming to close the deal must have been delegated the power to do so.

 

REFERENCES

  1. M.L. CHANDAK , K.D.ZACHARIAS, “et al”, B.C.THOMAS(ed.) ,Legal & Regulatory Aspects of Banking(4th edition), macmillian education ,476
  2.  HARSH JAIN, Doctrine of Ultra Vires under Company Law – What acts will be deemed as ultra vires?, iPLEADERS (June 1, 2018,), https://blog.ipleaders.in/borrowing-company-deemed-ultra-vires/
  3.  Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653.
  4. SIMRAN CHANDOK, CRITICAL ANALYSIS OF THE DOCTRINE OF ULTRA VIRES, Vol. 2, JCIL, 9, https://jcil.lsyndicate.com/wp-content/uploads/2016/09/Publication-Submission-Simran-Chandak.pdf
  5. Dr. Lakshmanaswamy Mudaliar v. LIC., 0 AIR (1963) SC 1185
  6. National Provincial Bank v. Introductions Ltd , (1969) 1 All ER 887
  7.  Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473
  8. ARTI BHATT, The Doctrine of Constructive Notice and Doctrine of Indoor Management, (Sep 14,2019) , https://thecompany.ninja/doctrine-of-constructive-notice/
  9. SANJANA BHARADWAJ, Principles Of Corporate Laws, http://studymaterial.unipune.ac.in:8080/jspui/bitstream/123456789/6229/2/CONSTRUCTIVE%20NOTICE%20.pdf
  10.  Law Bhoomi, Doctrine Of Constructive Liability And Doctrine Of Indoor Management Under Companies Act ,2013 (Dec 28,2020),  https://lawbhoomi.com/doctrine-of-constructive-liability-and-doctrine-of-indoor-management-under-companies-act-2013/
  11. Kotla Venkaswamy v. Chinta Ramamurthy, AIR 1934 Madras 579
  12.  AKANSHA, Rule of Constructive Notice, (Aug21, 2020)
  13. https://indianlawportal.co.in/rule-of-constructive-notice/
  14. ANSHIKA, Doctrine of Indoor Management ,( July 3, 2018), https://blog.ipleaders.in/doctrine-indoor-management-2/
  15. Royal British Bank vs. Turquand, (1856)6 E & B 327:(1843-1860) ALL ER Rep 435
  16.  Lakshmi Ratan Cotton Mills Co. Ltd v. J.K. Jute Mills Co. Ltd , AIR 1957 ALL 311.
  17. T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd , (1936) 6 Comp. Cas. 90.
  18. Anand Behari Lal v Dinshaw, A.I.R. (1942) Oudh 417.
  19.  Ruben v. Great Fingall Consolidated, (1906).