The Doctrine of Constructive Notice

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ROUGH DRAFT FOR COMPANY LAW PROJECT ON THE DOCTRINE OF CONSTRUCTIVE NOTICE PRELLIMINARY STAGE CONTENTS
  1. HISTORICAL ANALYSIS
  2. SHORT INTRODUCTION
  3. AIM OF THE PROJECT
  4. PROPOSED RESEARCH QUESTION
  5. DOCTRINE OF CONSTRUCTIVE NOTICE AND IT'S LIMITATIONS
  6. CONCLUSION
Historical Analysis: A Preview Of The Doctrine Of Constructive Notice The doctrine of constructive notice owes it’s origins to the United Kingdom where it was evolved on the demands of the companies so as to protect their interest against the dealings with third parties, The historical background of the doctrine is divided into two parts which is before and after 1855, since the concept of limited liability was made applicable in this year,[1] that time unlimited liability concept of shareholders ended and thus there was an urgent need felt to safeguard the companies liability. “In that they presumed to have knowledge of company’s document filed with the registrar, which are open to public for inspection and with the right to have certified 9 copies of relevant extract from them. Section 610 of our Companies Act 1956[2] contains this provision, irrespective of the fact, whether the third parties have the knowledge or not.”[3] Constructive notice refers to a legal fiction so that in a case concerning a person that person is deemed or construed to have prior information about the case even if he does not, however later it was understood that is such a procedure is to be followed than the law would be a little harsh on the less observant ones.[4] The brutality of the Doctrine of Constructive notice is to some degree lessened by the 'Tenet of Indoor administration' or 'Turquand's Rule'[5]. Initially the common law doctrine of constructive notice was laid in the case of Ernest v. Nicholls[6]and it was further explained in the case of Mahony v. East Holyford Mining Co[7] case, Master Wensleydale in Ernest case took the view that the tenets of organization would apply without the convention of helpful risk. The destination was to hold the shareholders obligated. The perception of Lord Wensleydale is not clear. Then again, it gives the idea that he appears to have recognized that it was to dodge this come about that the lawmaking body wanted to oblige an organization to enroll articles along these lines to make accessible the world data in order to make accessible to the world data in respect to who were the persons commissioned to tie the shareholders. Thus after it’s initial years of explanation it became a valid point of argument for the third parties that the doctrine was still a bit harsh on them and the courts both in India and abroad grew reluctant about it’s application. There grew to be many instances in which it was not practical enough to ascertain whether the sanctions for the company’s actions was there in the MOA and AOA or not and also the third parties were very fearful to ask the directors about it in the first place thus as a substitute the doctrine of Indoor management was culled out in the case of Royal Bank vs. Turquand[8] to mitigate the loss of the third parties. The courts in India also subsequently rejected the application of this doctrine in likewise in the case of Dehradun Mussoorie Electric Tramway Co. v. Jagamanandaradas[9]the Allahabad high court rejected it’s application holding the company liable as the directors had borrowed money which was in non-compliance with the MOA and also without resolution by members. Furthermore, in the case of Liquidator, Manasube & Co. (P.) Ltd. v. Commissioner of Police[10] the court held that it was duty of the third party lenders to acquaint themselves with the details of MOA of a company but it doesn’t mean that they have to embark upon an investigation so as to know about the legality of the dealings and regularity of directors. SHORT INTRODUCTION AND PARADOX: TODAY’S RELEVANCE In today’s recent times the doctrine of constructive notice can be best described as an unreal doctrine[11] or legal fiction it could never have been true given the kind of impracticality that it surfaced however through the years it’s application has brought a lot of disadvantage to the third parties and reaped undue benefits for the company and it’s directors. Innumerable parties enter into various contracts on a daily basis however this doctrine expects each and every one of such parties to know and have complete information about each and every official document and gazette of the company, even if we take that perspective in mind the validity of the transactions and dealings rarely depends upon these documents it depends upon the directors the real agents of the company. It’s the goodwill of the directors that matters the most. This is the primary reason why British and Indian courts have separated their ways from this doctrine, Indian courts never paid much attention to it in the first place, also the “European Communities Act by bringing section 9”[12] into perspective which works on the concept of good faith. The aforementioned stay to be the main reasons why the doctrine of Indoor Management[13] has been originated to lessen the rigor of the former doctrine, which gives a certain amount of freedom and latitude to the third parties so as to assume something on their part which any common man of “ordinary prudence”[14] would be sensible enough so as to assume. THE FUNDAMENTAL PREMISE OF THE PROJECT The doctrine of constructive notice has shown its merits and demerits well a greater deal of the latter in the past, however our main aim regarding this project is not just to dwell about them but to delve deeper into the fundamental of it’s limitations. Furthering it’s course the project will seek to show how these limitations affected the application and development of this doctrine and how it’s application has totally subsided in the modern day, getting replaced by the doctrine of indoor management. This brings us to the research question this project seeks to put up with and answer in the subsequent state. The Research Question – What are the limitations that the Doctrine of Constructive Notice had since the very beginning of it’s establishment and application, how it affected the cases in which it was applied, how it transformed and how these limitations could be or were eliminated by the Doctrine of Indoor Management? THE FUNDAMENTAL LIMTATIONS OF THE DOCTRINE OF CONSTRUCTIVE NOTICE The fundamental difficulty that exists with this doctrine is that it presupposes a lot of things n the part of the third party which in real life are very impractical and impossible, it says that the third parties must have all the prior knowledge required to enter in a particular transaction so as to mean that even if any wrongful act be done on the company’s behalf the third party could not claim compensation, like buyer beware/ caveat emptor[15] , it mitigates the duty of the company to act in good faith[16] to a very large extent. This doctrine in another of it’s following limitation extends a sense of gross negligence to the fact that of the third party being at mistake, “despite the fact that no clear run characterizing what might constitute terrible carelessness could by its extremely nature be set out, the Courts of Equity held that if a buyer of property overlooks to make legitimate and typical analyses into his seller's title, such oversight, without sensible description, might measure to horrible carelessness and the buyer must, accordingly, be altered with productive notice of realities which he might have known whether he had made such requests. This recommendation was likewise in a few cases rested on the first hypothesis of fake dismissing by saying that such exclusion from the buyer, if not demonstrated, may be proof "of an outline conflicting with genuine managing to escape information of the accurate state of the title". Anyhow whatever be the legitimate hypothesis on which the recommendation may be underpinned, the rule underlying the suggestion was that a buyer of property, as a standard judicious man, is normal, for the insurance of his own investment, to make fitting and ordinary analyses into his merchant's title before he buys the property and in the event that he discards to do along these lines, without any sensible description, a deduction can true blue be drawn that either he has willfully refrained from making requests with the end goal of escaping notice of realities which he might have known had he made the analyses or he is liable of terrible carelessness. This guideline was clarified by Lord Selborne, in Agra Bank v. Barry[17], where with reference to the obligation of a buyer to explore title the educated Law Lord said: It has been said in contention that examination of title and analysis after deeds is 'the obligation' of a buyer or a mortgagee; and, doubtlessly, there are powers, which do utilize that dialect. However this, assuming that it can legitimately be known as an obligation, is not an obligation owing to the conceivable holder of an inactive title or security. It is simply the course which a man managing genuine in the correct and ordinary way for his investment, should, without anyone else present or his specialist, to accompany, with a perspective to his title and his security. In the event that he doesn't accompany that course, the oversight of it may be a thing needing to be represented or illustrated. It may be proof assuming that it is not demonstrated, of an outline conflicting with true blue managing, to evade information of the correct state of the title. What is a sufficient illustration should dependably be an inquiry to be chosen with reference to the nature and circumstances of every specific case.”[18] Another limitation of this doctrine works on the restrictions it imposes on the companies’ directors, it is a fiction that could have biased effects for outcasts who work with the organization. INSTANCE - Case in point, if an organization's articles of acquaintanceship confined the forces of the overseeing executive and his power to enter into contracts in the interest of the organization, an outcast may finish up a business bargain with the overseeing chief, just to find that the organization revokes the agreement, and that he is then unable to propel the organization to complete its piece of the deal in light of the fact that the overseeing executive had surpassed his power, and the organization is not lawfully bound to the arrangement. The effect of the teaching of useful perceive in this circumstance might be that the outcast couldn't contend that he was unconscious of the cutoff points of the overseeing chief's power - he might be dealt with, in law, as knowing of those points of confinement on the support that he had "productive notice" of the restrictions on the grounds that they were recorded in the organization's open archives.[19] CONCLUSION It was, additionally, a fiction that could have biased effects for outcasts who work with the organization, at the time the doctrine of constructive notice was formed. The Memorandum of Association of a Company must be stopped with the Registrar of Companies. Since this is accessible for open review, individuals working with the Company are allowed to investigate the record to check whether there is any restriction of forces or constraints put on the way of the business. This made an issue untouchables are esteemed to know any confinement put on the Directors of the Company. Hence if later, it was found that there was some unpredictability inside the Company in appreciation of any choices, untouchables having managing the Company are esteemed to be mindful of it. This got known as the regulation of productive notice. [20] However this made issue for outcasts who had no information if some interior system had not been agreed to. Now we have come to a juncture where the doctrine of constructive notice is not used at all by the courts and if it is used it is used in places and cases it was not originally meant for, the aforementioned limitations have forced the jurors and interpreters to come out with the Indoor Management Rule which has taken the former doctrine’s place gradually, in today’s world. 1
[1] Doctrine of Ultra Vires under Companies Act 1956, By Hari Ram Yadav, Dept. Of Law, MDU, Rohtak, http://shodhganga.inflibnet.ac.in/bitstream/10603/9793/17/17_summary.pdf [2] Central Government Act, Section 610 in The Companies Act, 1956 [3] Ibid see 1. [4] Constructive notice, legal information institute, Cornell University Law School, http://www.law.cornell.edu/wex/constructive_notice [5] Royal British Bank v Turquand(1856) 6 E&B 327 [6] Ernest v Nicholls(1857) 6 HL Cas 401. [7] Mahony v.East Holyford Mining Co., [1875] LR 7 HL 869. [8] Royal British Bank v Turquand(1856) 6 E&B 327 [9] Dehra Dun Mussoorie Electric Tramway v. Jagmandardas, AIR 1932 A;ll 141 [10] Official Liquidator of Manasube & Co. Pvt. Ltd. v. Commissioner of police,[1968] 38 Com Cases 884 (Mad). [11] Doctrine of Constructive Notice, By Sameer Sharma, 06 September 2010, Lawyer’s Club India, http://www.lawyersclubindia.com/articles/Doctrine-of-Constructive-Notice-3133.asp#.Uxyq99YRKsZ [12] Doctrine of Ultra Vires under Companies Act 1956, By Hari Ram Yadav, Dept. Of Law, MDU, Rohtak, http://shodhganga.inflibnet.ac.in/bitstream/10603/9793/17/17_summary.pdf [13] Company Law Doctrines and Authority to Contract Andrew R. Thompson The University of Toronto Law Journal, Vol. 11, No. 2 (1956) , pp. 248-289 Published by:University of Toronto Press, Article DOI: 10.2307/824437,Article Stable URL: http://www.jstor.org/stable/824437 [14] Standard of Care and the “Reasonable Person”, Find Law, http://injury.findlaw.com/accident-injury-law/standards-of-care-and-the-reasonable-person.html. [15] Caveat Emptor Legal Definition, Latin: Buyer Beware, Duhaime Legal Dictionary, http://www.duhaime.org/LegalDictionary/C/CaveatEmptor.aspx. [16] Duty Of Good Faith, Legal Information Institute, Http://Www.Law.Cornell.Edu/Wex/Duty_Of_Good_Faith [17] Agra Bank v. Barry (1874) L.r. 7 H.l. 135 [18] Doctrine of Constructive Notice, By Sameer Sharma, 06 September 2010, Lawyer’s Club India, http://www.lawyersclubindia.com/articles/Doctrine-of-Constructive-Notice-3133.asp#.Uxyq99YRKsZ [19] The Companies Act of 2008 has not completely abolished "constructive notice", NEWSLTTER, ROODT Inc. Attorneys, http://www.roodtinc.com/newsletter55.asp [20] THE INDOOR MANAGEMENT RULE, Wednesday, October 15, 2008, http://vijayhighcourt1.blogspot.in/2008/10/indoor-management-rule.html
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