The doctrines of ultra vires, constructive notice, and indoor management collectively define the boundaries of a company’s powers and an outsider’s rights when dealing with a company; in essence, ultra vires limits corporate capacity, constructive notice protects the company by imputing knowledge of public documents to outsiders, and indoor management protects outsiders by presuming internal compliance with procedures.
Definitions
- Ultra vires: Acts beyond the company’s legal capacity as set by its Memorandum of Association (MoA) or beyond directors’ authority are ultra vires; such acts are void and cannot be enforced against or by the company.
- Constructive notice: Since the MoA and Articles of Association (AoA) are public documents, outsiders are deemed to know their contents and cannot claim ignorance of restrictions apparent on their face.
- Indoor management (Turquand rule): Outsiders dealing in good faith may assume the company has complied with its internal procedures and formalities; they need not investigate internal regularity beyond the public documents.
Effects
- Effect of ultra vires to the company: A contract ultra vires the MoA is void ab initio; it cannot be ratified even unanimously by shareholders because it exceeds the company’s capacity.
- Effect on directors: Directors authorizing ultra vires acts may be personally liable to compensate the company; shareholders may restrain proposed ultra vires acts via injunction.
- Restitution and tracing: Where money or property from an ultra vires transaction is traceable and remains with the company, the provider may seek an injunction or restitution; if it has been used for legitimate corporate debts, subrogation may be available.
- Effect of constructive notice: Outsiders are fixed with knowledge of limitations in MoA/AoA (e.g., borrowing caps, seal requirements) and cannot enforce transactions that contravene clear public restrictions.
- Effect of indoor management: If the transaction is within the apparent authority and consistent with MoA/AoA, outsiders can presume internal approvals (e.g., board resolutions) were properly obtained, unless red flags exist.
Constructive notice
- Scope: Applies to the MoA, AoA, and documents required to be publicly filed (e.g., special resolutions altering powers); outsiders are deemed to know these and their plain restrictions.
- Limits: It does not impute knowledge of internal resolutions, delegation registers, minute books, or informal practices; it only extends to what is publicly accessible and reasonably discoverable.
- Practical implications: Outsiders must align transactions with the company’s objects and explicit procedural prerequisites in the AoA (e.g., execution formalities, share transfer restrictions) to ensure enforceability.
Indoor management
- Core rule: Outsiders may assume compliance with internal procedures (e.g., that necessary resolutions were properly passed) where the act is not inconsistent with the MoA/AoA and the counterparty acts in good faith.
- Common applications: Validity of share allotments, borrowings, or contracts signed by officers with apparent authority is upheld despite internal irregularities such as missing or defective resolutions.
- Key exceptions: The protection fails where:
- Knowledge or suspicion: The outsider knows of the irregularity or circumstances raise suspicion requiring inquiry.
- Forgery: The rule does not validate forged acts or sham authority.
- Lack of apparent authority: If the officer clearly lacks authority per public documents, the outsider cannot rely on presumed internal compliance.
Interplay among the doctrines
- Sequence of analysis:
- Capacity check (ultra vires to MoA): If the transaction is beyond corporate objects, it is void and cannot be cured.
- Consistency with AoA: If inconsistent with public restrictions (e.g., specific execution requirements), constructive notice prevents enforcement by outsiders.
- Internal regularity: If consistent on its face with MoA/AoA and within apparent authority, indoor management protects the outsider absent red flags.
- Director authority vs company capacity: Acts ultra vires the directors but intra vires the company can be ratified by proper corporate action; acts ultra vires the company cannot.
Banking and credit perspective
- Due diligence: Capacity vetting against the MoA objects and borrowing powers is essential; any financing purpose or structure must be squarely within the objects and permitted powers.
- Document mechanics: Ensure compliance with AoA-expressed formalities (authorized signatories, common seal if applicable, required board/shareholder approvals) to avoid constructive notice pitfalls.
- Reliance materials: Procure certified copies of board/shareholder resolutions and incumbency evidence; indoor management helps, but robust evidence reduces risk of exception triggers.
- Red flags: Unusual urgency, deviation from policy, inconsistent titles, or obvious conflicts should prompt inquiry; failure to inquire can defeat indoor management protection.
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