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Doctrine Of Ultra Vires, Doctrine Of Constructive Notice And Doctrine Of Indoor Management

Doctrine Of Ultra Vires:

The Doctrine of ultra-vires was given under s. 4(1)(c), s. 245(1)(b) of the Companies Act, 2013. The term Ultra-vires (Beyond-powers) for a firm refers to an action that is beyond the company's legal capacity and jurisdiction. If a corporation does an act or a series of activities that are in violation of the Companies Act of 1956, they are subject to legal penalties. The word "Ultra vires" refers to conduct carried out beyond of the legal powers granted by the object clause.

The doctrine of ultra vires restricts the company's actions to those defined under the object clause of MOA. The effects of ultra-vires transactions are void-ab-initio, they cannot be turned into intra-vires after the ratification by the share-holders. The injunction orders can be issue. The directors can be personally made liable. Sometimes, even criminal action can be taken against deliberate fraud/misapplication.

  1. When done in irregular manner, which is otherwise Intra-vires to the company, in that case; shareholders can ratify.
  2. Ultra-vires to the directors of the company, which is which is otherwise Intra-vires to the company, in that case; shareholders can ratify.
  3. Ultra-vires to the articles of the company, which is otherwise Intra-vires to the company, in that case; AOA can be altered by passing a resolution.
It is to be noted that if the company acquiring the property is ultra-vires, the company will have the right over such property and such property will be secured.

Types of ultra vires and their ratification:

  1. In case of Ultra-vires to the companies act, it is Void-ab-initio, Shareholders cannot ratify.
  2. In case of Ultra vires to the memorandum of the company, it is Void-ab-initio and Shareholders cannot ratify.
  3. In case of Ultra-vires to the articles of the company which is otherwise Intra-vires to the company, Shareholders can ratify after alterations.
  4. In case of Ultra vires to the directors of the company, which is otherwise Intra-vires to the company, Shareholders can ratify.

Main purpose of the doctrine: The things in which the company's money is invested would be made known to the company's investors. It is the process of guaranteeing creditors that the money they have entrusted to the company is not being squandered on unauthorised activities.

The basic principle and reality of the Ultra Vires concept is that a company, as a corporate person, must not be mulcted (charged or penalised) for its own activities or acts performed by its representatives if they are outside of its rights and privileges. In the case of "National Telephone Co v. St Peter Port Constables", a telephone company installed telephone lines in a certain region. The Memorandum gave the business no authority to install cables there. They were chopped down by the defendants. It was held that the corporation has the right to sue for destruction to the wires.

Difference between an ultra-vires and an illegal act: An ultra-vires act is not the same as an illegal act. They are frequently misunderstood as synonyms for each other, although they are not. Ultra-vires is anything that goes above the company's stated aims as stated in its memorandum. Anything that is illegal is an offence, carries civil liability, or is forbidden by law. Anything that is ultra-vires may/may not be prohibited, but it is void-ab-initio in both cases.

Doctrine of Constructive Notice:

Doctrine lowers the level of complicity in corporate rules and regulations. When dealing with outsiders, doctrine serves as a safeguard for the company. The MOA and the AOA of the corporation are filed with the ROC when the company is formed. These documents serve as the business charter, and the company is controlled by the laws listed there. A corporation is a public entity, and its documents, such as the Memorandum of Association and Articles of Association, are available for public view.

As a result, it is believed that the outsider who is doing business with the corporation has gone over these documents. Outsiders have a responsibility to be aware of the company laws and regulations since they are publicly available. The "Doctrine of Constructive Notice" is the name given to such assumption.

It states that the corporations bylaws must be recognized to the general public because that material is publicly available. It is not the company's responsibility to provide this material to the outsider because it is publicly available. The legal basis for this approach is S. 399 of the CA 2013. The section, enables an outsider to see and browse through the company records that are kept by the registrar.

In "Oakbank Oil Co. vs. Crum", it was held that anyone involved in an agreement with the company is presumed to have insight and understanding of the company's MOA and AOA, according. As a result, the person is believed to be aware of it. This principle is known as doctrine of constructive notice.

Doctrine of Indoor Management:

The nature of the "Doctrine of Indoor Management" is diametrically opposed with that of the "doctrine of constructive notice". The first one protects the outsider from the company's illegal conduct, whereas the second one protects the corporation from the outsider's illegal conduct. Doctrine of Indoor Management is also known as the "Turquand's Rule", is an old established idea that was recognised in the framework of the Doctrine of Constructive Notice 150 years ago.

The doctrine of Indoor Management is an exception to the Doctrine of Constructive Notice. This doctrine highlights the premise that an outsider acting in good faith and entering into a deal with a firm can have an assumption there were no internal anomalies and that the corporation has followed all procedural standards.

An outsider is supposed to know the Charter of a Corporation; but not what might/might not have actually occurred within the locked doors was held as in Pacific Coast Coal Mines Ltd v. Arbuthnot. Justice Bray correctly observed in Dey v. Pullinger Engg Co. that the cycle of trade would not flow properly if individuals dealing with firms were obliged to investigate the company's internal procedures and machinery to determine if anything was incorrect.

In Morris v. Kanssen, Lord Simonds said that people in the industrial world would have been hesitant to participate into agreements with corporations if they were to investigate the company's internal dynamics.

Exception: It is critical to broaden the reach of this doctrine; otherwise, it will be narrow and biased in favour of outsiders to the organisation, posing a significant risk to the company.
  1. Knowledge of irregularity:
    When an outsider engaging into a contract with a corporation has constructive or real notice of a problem with the internal corporate management, he or she is forbidden from seeking relief under the doctrine of indoor management.
  2. Forgery:
    It is important to emphasise that the Doctrine of Indoor Management does not apply when an outsider depends on a forged document in the name of the company.
  3. Negligence:
    The remedy under this concept is also unavailable where the facts and circumstances around the contract are sufficiently dubious that they urge investigation, and the outsider of the corporation fails to conduct an effective investigation.
  4. Acts beyond the scope of apparent authority:
    This remedy cannot be used against acts that are beyond the scope of apparent authority and the company cannot be held liable.

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