Doctrine of Constructive Notice: Everything You Need to Know
A doctrine of constructive notice refers to the idea that everyone involved with a business has knowledge of the company's articles of association.3 min read
2. Effect of the Doctrine of Constructive Liability
3. Challenges to the Doctrine of Constructive Liability: Evolution of Doctrine of Indoor Management
4. The Reform of Constructive Notice
5. Death of the Doctrine of Constructive Notice and Its Impact on the Business & Corporate Ecosystem
A doctrine of constructive notice refers to the idea that everyone involved with a business has knowledge of the company's articles of association. It reduces liability, assuming that because the company's information is public record, it should have been known by everyone entering into the contract.
What Is Doctrine of Constructive Notice?
Section 610 is the specific regulation that requires the registrar to inspect all of the incorporation documents. Because all documents registered with the registrar are public documents, any person considering entering into a contract with the company should be aware of the individual powers and conditions of the company.
The doctrine of constructive notice refers to memorandum articles and any additional documents that are publicly filed with the registrar. This notice prevents outsiders from suing the company with grounds of not understanding the companies current positions and powers.
It is the responsibility of the party entering into a contract to collect, read and understand the documents. The constructive notice simply means that notice was given, even without an actual notice existing. A common example of this is when a court is unable to directly reach someone and publishes a summons in the public newspaper. This is considered to be a constructive notice.
Effect of the Doctrine of Constructive Liability
The courts see it as the responsibility of the party entering into the contract to inspect the legal documents before agreeing to the contract terms. It is also expected that the person fully understands each of the terms of the contract before agreeing to it. This doctrine prevents legal lawsuits from being filed.
Challenges to the Doctrine of Constructive Liability: Evolution of Doctrine of Indoor Management
Many businesses have found the rule of the doctrine of constructive notice to be inconvenient for daily business transactions. The doctrine of indoor management refers to the inability of vendors, creditors, or other outsiders to actually ask for clarification about operating sanctions. This is not always a possibility, depending on the structure or setup of the business.
The Reform of Constructive Notice
Europe has implemented an edited Section 9 to the constructive notice act. Through this edit, they have repealed the constructive notice act entirely. Additionally, they have added two sections to better clarify the notice.
- Section 35B: Parties entering into a contract with a company are required to inquire about permissions and limitations to power.
- S.711A: This act was never actually implemented. Because the doctrine of constructive notice was eliminated entirely, only Section 35B currently exists.
Death of the Doctrine of Constructive Notice and Its Impact on the Business & Corporate Ecosystem
The Companies Act of 2016 has significantly changed the doctrine of constructive notice. The changes, however, continue to be complex and confusing. For example, companies that were incorporated before the 2016 change and have not made any changes since, might still be held to the previous regulations.
If any major changes were made after the new act was signed into place, its implications are not as clear. It is not the same process to obtain an updated list of directors and board members. This change has led to two significant changes:
- Primary vs. secondary source: Interested parties can still obtain information from the registrar for a minimal fee, but this is now considered to be a secondary source. The Company Secretary would be considered the primary source. Evaluating the current updated list could be difficult when deciding which party to contact.
- The responsibility of proof: Perhaps the biggest influence the death of the doctrine has contributed to the process is that the responsibility now lies on the business. It is in the companies best interest to provide any required information to the interested party. With this information, they can make educated decisions as to whether or not to enter into a contract with the business.
Under the new changes of the Company Act of 2016, it is the responsibility of the directors and board members to provide as much information as needed to hold them liable later on. The company must provide the information, documents, or proof in the event of a liability lawsuit.
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