Companies Act 1956: Doctrines On Memorandum and Articles

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Principle of Constructive notice

Constructive Notice means every person dealing with the company must read the articles and the memorandum of the company before dealing with the company. So if any person dealing with the company does not have knowledge of the articles or memorandum than if any loss is caused to such person than such person himself is liable for the loss.

Example:

Mr. A purchases some goods from a company according to the articles of the company the company was not authorised to sell the goods to the customers hence the sale was not valid according to the articles.

If the directors of a company have sold the goods than the sale will not be binding upon the company and it has no legal effect. The outsider should have the knowledge of articles of company before dealing with the company.

                The articles and Memorandum of a company are the public documents hence any person dealing with the company may read the articles and Memorandum, these documents are available with the company as well as the registrar of companies.

Principle of Indoor Management:

Indoor Management means that any person dealing with the company cannot have knowledge of internal working of company. The principle of Indoor Management works against the company hence this principle is helpful for the outsiders. According to this principle every person dealing with the company can read the Articles and Memorandum only however he cannot check that the articles are correctly applied by the company hence if a company has principles in the articles then the company must internally fulfil the principles.

Example Case Study (Royal British bank Vs Terquent)

In this case Terquent purchased some debenture of the company according to the articles the debentures were to be issued by the company only after signing the debenture certificate by a M.D and one director of company. In this case the certificate was signed by the director and the M.D’s sign was forged. In this case it was decided by the court that the Terquent could not verify that the M.D’s sign was forged on the Deb certificate, hence Deb certificate was valid and he was a valid debenture holder.

The indoor management principle is the exception to principle of constructive notice hence in this principle an outsider is not bound to verify the internal working of the company.

In the Indoor Management there is an exception that if the outsider has the knowledge regarding the forgery than he cannot claim the benefit of indoor management.

Principle Of Ultra Vires:

This principle means that the directors have done something which is out of the powers given to them. Hence the work done by the directors is not a valid work and the directors are personally liable for such work. Ultra means BEYOND and vires means POWER. So ultra vires is work beyond the power of directors.

Sometime the Ultra Vires Act is against the provisions of articles than the articles may be altered and it will be valid however sometimes the ultra vires act is against the provisions of companies act, this act cannot be made valid in any circumstance.

Ultra vires transactions are always against the outsiders because these transaction are never valid.