Doctrine of Ultra Vires, Constructive Notice & Indoor Management
1. Doctrine of Ultra Vires
Meaning & Definition
The term Ultra Vires is derived from Latin, meaning “beyond the powers.” Under Company Law, this doctrine implies that a company cannot go beyond the objects mentioned in its Memorandum of Association (MoA). Any act done beyond those objects is void ab initio and cannot be ratified, even if all shareholders agree.
Legal Basis
- Section 4 of the Companies Act, 2013 – deals with object clauses in the MoA.
- The company must act within the scope defined in its MoA.
Purpose
- To protect investors and creditors by ensuring company funds are used only for authorized activities.
- Prevents deviation from the company’s primary objectives.
Leading Case Law
Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875) LR 7 HL 653
Held: A contract entered beyond the objects of the company was ultra vires and hence void.
Effects
- The contract is unenforceable.
- Directors may be personally liable for ultra vires acts.
- Company assets cannot be used for unauthorized purposes.
2. Doctrine of Constructive Notice
Meaning
The doctrine implies that every person dealing with a company is presumed to have knowledge of the contents of the company’s public documents (MoA & AoA) since they are filed with the Registrar of Companies and are accessible under public records.
Purpose
- To protect the company from fraudulent or negligent dealings.
- Puts the onus on outsiders to verify company powers and procedures.
Legal Implication
- A person dealing with the company cannot claim ignorance of limitations imposed by the MoA or AoA.
- Even if the party has not read the documents, the law assumes they have constructive notice of them.
Case Law
Kotla Venkataswamy v. Ramamurthy AIR 1934 Mad 579
Held: A person dealing with the company is bound to read not only the MoA and AoA but also comply with its conditions. Failure to do so binds them to the consequences.
3. Doctrine of Indoor Management (Exception to Constructive Notice)
Meaning
This doctrine, also known as the Rule in Turquand’s Case, protects outsiders dealing with the company in good faith. It states that persons dealing with a company are entitled to presume that internal procedures and formalities have been properly followed.
Origin
Royal British Bank v. Turquand (1856) 6 E&B 327
Held: Outsiders are not bound to inquire into the regularity of internal proceedings.
Purpose
- To balance the rigid application of the Constructive Notice doctrine.
- Provides protection to bona fide third parties against irregular acts by the company’s officers.
Applicability
The rule applies when:
- The act is within the company’s powers (MoA/AoA).
- The third party acts in good faith.
- There is no suspicion of irregularity.
Exceptions
The doctrine does not apply when:
- The outsider has actual or constructive knowledge of the irregularity.
- The transaction is suspicious or fraudulent.
- The outsider has not acted in good faith.
- Acts done are beyond the scope of the company’s powers (i.e., ultra vires).
Case Law
- Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mills Co. Ltd. AIR 1957 All 311
Held: The company was bound by the acts of the Managing Director even if internal approval was not recorded, as the third party had no reason to suspect irregularity.
Comparison of Doctrines
| Aspect | Ultra Vires | Constructive Notice | Indoor Management |
|---|---|---|---|
| Source | MoA | MoA & AoA (Public documents) | Common law (Turquand’s Rule) |
| Protects | Company & shareholders | Company | Outsiders dealing with the company |
| Nature | Restricts company’s power | Presumes outsider’s knowledge | Presumes internal compliance |
| Remedy | Act is void and cannot be ratified | Outsider bears risk | Outsider is protected if in good faith |
Conclusion
These doctrines form the backbone of the legal relationship between a company and external parties. While Ultra Vires limits the company’s actions to its chartered objectives, Constructive Notice warns third parties to review those limits. The Doctrine of Indoor Management, however, acts as a shield for innocent third parties dealing with companies in good faith, ensuring that internal procedural lapses do not unfairly prejudice external stakeholders.
