CAPACITY AND POWERS OF A COMPANY (Continuation)
Constructive Notice Rule
In Company law, the doctrine of constructive notice is a doctrine where all persons dealing with a company are deemed to have knowledge of the company’s articles of association and memorandum of association. The doctrine deals with the capacity and authority of a company.
The doctrine has its most potent application in the ultra vires doctrine. A person dealing with a company is expected to inspect its public documents in order to satisfy himself that the transaction fell within the competence or object clause of the company otherwise he would have himself to blame if the contract was ultra vires. In Re Jon Beaufort (London), the company was authorized by its memorandum to carry on the business of costumers and gown makers. The company then started the business of making veneered panels. This was ultra vires. Builders built the factory, coke suppliers sold the company coke. The coke company knew from the correspondence that the company was engaged in veneer production. They therefore were under constructive notice of the contents of the memorandum. They were unable to sue for the price of the coal as the transaction was ultra vires.
The Rule in Royal British Bank v Turquand
The rule in this case is to the effect that a third party who deals with a company in reliance with public documents is entitled to assume that all matters of internal management had been complied with where such dealings are consistent with the documents. In essence, failure to comply with the indoor (internal) management rule of a company cannot prejudice the rights of the third party who had acted in reliance on the public documents. The rule therefore operates as an estoppel against the company.
In the above case, a plaintiff sought payment from the defendants, a joint stock Company, on a bond, signed by two directors, under seal of the Company whereby the company acknowledged themselves to be bound to the plaintiff in 2000 pounds. The company said that there had been no resolution authorising the making of the bond, and that it was given without the authority of the shareholders. It was held that the plaintiff was entitled to judgement as he had the right to presume that there had been a resolution at a general meeting, authorising the borrowing of the money on the bond. The court noted that outsiders dealing with a company in good faith can assume that acts within the company’s constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular. The rule in this case has been applied in Metalimpex v AG, Leventis; Trenco v African Real Estate; Obaseki v Africa Continental Bank.
Exceptions to the rule in Turquand’s case:
1. Where there are suspicious circumstances which put the third party on enquiry (Underwood v Bank of Liverpool & Martins)
2. Where the third party knows of the internal irregularity (Morris v Kansen)
3. Where the document relied on by the third party is a forgery (Reuben v Great Fingall Consolidated).
The above doctrine of constructive notice has been abolished under sections 68 & 69 of CAMA. These sections allow such persons dealing with the company to make certain presumptions of regularity. This means that creditors who lend companies funds with no knowledge of the provisions of its registrations are no longer caught within the constructive notice rule. But a person is not entitled to such presumptions if he has actual knowledge to the contrary or if having regard to his position with or relationship to the company, he ought to have known the contrary (S. 65(a) CAMA). This introduces a new doctrine of actual knowledge and one of implied knowledge. S. 65(b) CAMA is to the effect that if in fact a business is being carried on by the company, the company shall not escape liability for acts undertaken in connection with that business merely because the business in question was not among the business authorized by the company's memorandum.
From the above, it seems the constructive rule has been abolished both by the decision in Turquand’s case and the express provisions of sections 65, 68 and 69 CAMA.