Kotla Venkataswamy versus Rammurthy, AIR 1934 Mad 579

This case states that the Doctrine of Constructive Notice mandates that before entering into a transaction with a company, one should be well aware of the rights and obligations of the directors of the company, all the more so, when the concerned documents are available for public access.
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Introduction

In this case, the court applied the doctrine of constructive notice while interpreting the terms of a contract. The Memorandum of Association (hereinafter ‘MOA’), as well as the Articles of Association (hereinafter ‘AOA’) of any company,  are two vital documents for any company. These documents are also available for public access.  This means that whenever any person is contemplating entering into a contract or a business relation with any company, he/she has the opportunity to ascertain the facts about the powers and other relevant information about the company’s directors. Therefore, it is a presumption that a person contracting with a company has sufficient knowledge about the company and its directors and the power/authority delegated to the directors. This information is generally available in the AOA or MOA. A person should retain knowledge from these documents can be retained by simply reading them.

Facts

The plaintiff, in this case, had appeared before this court to enforce a mortgage deed for Rs. 1000. “South Indian Agricultural and Industrial Improvement Co., Ltd”– the company, had executed the deed in favor of Venkamma. Later, Venkamma had vested her interest to the plaintiff. The company underwent voluntary liquidation soon after the mortgage and sold off the property purchased by one of the defendants. The two defendants- the working director and secretary to the company signed this mortgage deed When the company went into liquidation, to enforce the mortgage deed, the plaintiff filed a case before a lower court. The lower court rejected the contentions made by the plaintiff. The Courts rejected the first appeal by the plaintiff on similar grounds. Finally, the plaintiff appeared before the Madras High Court on the second appeal, seeking appropriate relief.

Issue

Madras High Court discussed the following as one of the major issues:

  1. Whether the mortgage deed was validly executed such that the company would be liable and bound by the same?

Held

The Court read the AOA of the company and held that the lower court’s decision to reject Plaintiff’s request is correct. The company was not held liable for non-execution of mortgage deed because the conditions of AOA were not fulfilled. The court dismissed the suit with costs and stated that the Plaintiff failed to take sufficient steps to ensure valid execution of the deed.

Analysis

The decision of the court was appropriate because the mortgage deed was invalid according to the AOA of the company. Article 15 of the AOA required signature by the Company’s Managing Director, the Secretary, and the Working Director, on a valid deed. In the absence of even a single signature, the deed was to be considered invalid. The AOA is a public document which allows people to gain information about a company. The Court applied the Doctrine of Constructive Notice and held that the mortgage deed between the plaintiff and the company was invalid because it was signed by the Secretary and the Working Director of the company, but not by the Managing Director. The Plaintiff was expected to have constructive notice of what is laid down in the AOA of the company before entering into a transaction with the company.

Conclusion

The Court dismissed this suit to execute the deed of mortgage by applying the Doctrine of Constructive Notice. This doctrine mandates that before entering into a transaction with a company, one should be well aware of the rights and obligations of the company’s directors, specially when the concerned documents are publicly available. Additionally, the plaintiff failed to justify the absence of Managing Director’s signature on the deed. She claimed that the managing director was absent because he was facing criminal charges. However, there was no evidence to support this claim. The Madras High Court did not delve into this question.

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