CAIIB BRBL Module D Unit 19 : Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management

27/11/2023

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CAIIB Paper 4 BRBL Module D Unit 19 : Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module D (COMMERCIAL & OTHER LAWS WITH REFERENCE TO BANKING OPERATIONS) Unit 19 : Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management, Aspirants must go through this article to better understand the topic, Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management and practice using our Online Mock Test Series to strengthen their knowledge of Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management. Unit 19 : Doctrines Of Ultra Vires/ Constructive Notice/ Indoor Management

Doctrine Of Ultra Vires

The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of a company, as specified in its Memorandum of Association, can be departed from only to the extent permitted by the Act.
When a company exercises its powers to promote and/or realize any of its objectives stated in the memorandum of association, it is intra vires (i.e. within the powers of) the company. However, any other act of the company which is outside the scope of the objects clause of the memorandum of association is known as ultra vires (i.e. beyond the powers of) the company. The company cannot sue on an ultra vires transaction. Further, it cannot be sued too.

Effects Of Ultra Vires Transactions

An ultra vires transaction is void ab initio and therefore cannot become intra vires by reason of ratification. No company can be held liable for obligations arising out of such a contract.
If lending done by the company is ultra vires then the company is entitled to recover the money from the debtors because the debtors cannot say that the company had no power to lend.
If the rendering of a particular service by the company is ultra vires the company is entitled to recover the charges for such services. If the property of the company is delivered to an outsider through an ultra vires act, the company can get back the property if such property can be traced.
If the company borrows money from a lender beyond the limits which it is permitted to borrow, such borrowing would be ultra vires and the company may not be held to be liable for the same unless the money has been used for the purposes of the company.
However, the lender can trace the assets created out of such borrowing and can proceed against those assets for recovery of the money due to him. This is popularly known as ‘Doctrine of Tracing’ which is well recognized by Foreign Courts as well as Indian Courts.
If a company’s money has been spent ultra vires in purchasing any property the company is entitled to the ownership of such a property because that asset though wrongly acquired represents the capital of the company.
If a director of a company makes an ultra vires payment, he is personally liable to the company and he can be compelled to refund the money. In the case of deliberate misapplication, criminal action can also be taken for fraud.
Directors are the agents of the company. Hence, they must act within the limits of the powers of the company. If they induce (however innocently) an outsider to contract with the company in a matter in which the company does not have power to act, they will be personally liable to such an outsider for his loss provided that the outsider had no knowledge of the fact that the act was ultra vires the company.

Constructive Notice of Memorandum of Association And Articles of Association

The memorandum of association and articles of association of a company are registered with the Registrar of Companies at the time of incorporation. As the office of the registrar of companies is a public office, they become public documents. Hence, the act expressly guarantees the right of inspection of these documents to all. It is therefore the duty of every person who deals with a company to inspect its public documents. However, whether a person has actually read them or not he shall be in the same position as if he had read them.
In other words, he will be presumed to have knowledge of the contents of these documents and to have understood them according to their proper meaning. This kind of presumed notice is known as constructive notice. This is known as the doctrine of constructive notice.

Effect Of The Doctrine Of Constructive Notice

He who deals with the company is deemed to have notice of the public documents whether he has actually seen them or not.
A person dealing with the company is not only deemed to have notice but is also presumed to have read those documents and to have understood not only the company’s powers but also of its officers.
The doctrine of constructive notice is of a negative nature in the sense that it stops a person from contending (arguing) that he had no notice of the contents of the public documents.
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.

Doctrine Of Indoor Management

A person who deals with the company is deemed to have read and understood the registered public documents such as the memorandum of association and articles of association, etc., to see that his contract with the company is not inconsistent with them. But he is not bound to inquire into the regularity of the company’s internal functioning or the internal management of the company. Hence, if his contract is consistent with the public documents, the company is bound by such contract. He will not be affected by any irregularity in the internal management of the company. This is known as the doctrine of indoor management.
Doctrine of indoor management protects outsiders dealing with the company.

Exceptions to Doctrine Of Indoor Management

Knowledge of internal irregularity: Where a person dealing with the company has actual knowledge of the internal irregularity of the company he is not entitled to claim protection of this doctrine because he could have taken measures For self-protection.
Acts outside apparent authority of an officer of company: Finally, if an officer of the company makes a contract with an outsider and if the act of the officer falls outside the apparent authority of an officer, then the company is not bound by such a contract.

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CAIIB Paper 4 (BRBL) Module D Unit 19 ( Ambitious_Baba )