Unit - 58 : Doctrine of Ultra Vires / Constructive Notice/ Indoor Management
Legal & Regulatory Aspects of Banking -
Unit - 58 : Doctrines of Ultra Vires / Constructive Notice/ Indoor Management An act of the company must not be beyond the objects clause, otherwise it will be ultravires and, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning of ultra vires objects clause of the company’s memorandum.
Basic principles included the following: An ultra vires transaction cannot be ratified by all the shareholders, even if they wish it to be ratified. The doctrine of estoppel usually precluded reliance on the defense of ultra vireswhere the transaction was fully performed by one party A fortiori, a transaction which was fully performed by both parties could not be attacked. If the contract was fully executory, the defense of ultra vires might be raised by either party. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi contract for recovery of benefits conferred was available. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.
Constructive notice is the legal fiction that signifies that a person or entity should have known, as a reasonable person would have, even if they have no actual knowledge of it. For example, if it is not possible to serve notice personally then a summons may be posted on a court house bulletin board or legally advertised in an approved newspaper. The person is considered to have received notice even if they were not aware of it. The phrase "legal fiction" should not be construed to mean that the concept of constructive notice is legally invalid. In companies law the doctrine of constructive notice is a doctrine where all persons dealing with a company are deemed (or "construed") to have knowledge of the company's articles of association and memorandum of association. The doctrine of indoor management is an exception to this rule.
The harshness of the doctrine of constructive notice is somewhat reduced by the "Rule of Indoor management" or "Turquand's Rule". The Rule derives its name from the case of Royal British Bank v Turquand, where the defendant was the liquidator of the insolvent "Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company". The Company had borrowed from Bank's current a/c by giving a bond worth 2000 pounds. It was held that the company's directors were only authorised to enter into transactions of borrowing money provided they were allowed to do so by resolution. The resolution was passed and the Bank on verifying such resolution only did they lend such money to the company. The articles mentioned of the provision that the company ought to pass a resolution and directors could not borrow more than amount specified in the resolution. Articles were registered with Companies House so there was constructive notice. But the bank could not have known about the resolution as they were not registrable and thus were not a public document. The Bond was held valid and there was no requirement to know the company's internal workings. This is the "Indoor management rule"