The memorandum and the articles of association areevidently constituted within the Companies Act 2006 (CA). It is important tounderstand the extent to which a shift and difference has been brought aboutsince the Companies Act 1985 (CA). Distinctively, the articles of association consistof a complex documentation including the shares of the company, rules andpowers of the directors, alongside the meetings within the company conducted1.
Further, it is clearly established in Hickman v Kent & Romney MarshSheepbreeders Association2that, the memorandum and the articles of association constitute a contractbetween the company and the members so far as they confer rights on the members3.Thus, they do possess a contractual nature under s.33(1) of the CA 2006. Toadd, it is important to comprehend whether it matters if an insider or anoutsider, may or may not enforce the articles of association. Significant tonote also, that under s.21 of the CA 2006, unless the company makes changeswhich contravene the order of the court or company law4,the company can alter the articles of association by special resolution of 75%.
This must be, as concluded in Allenv Gold Reefs of West Africa Ltd, a bona fideso, done in good faith benefitting the company. Though this may seemirrelevant, it actually holds significance towards outsider rights when needingto enforce the articles of association such as in Re Richmond Gate Property Co5.This may signifythat being an insider or outsider of the company does not affect if the articlesof association can be enforced. Consequently, this will be discussed with theimportance of common law towards governing enforcement of the articles ofassociation in light of the view, if it fits for purpose. Evidently, under section 17 of the CA 2006, unless thecontext otherwise requires, references in the Companies Act to a company’sconstitution include the company’s articles, any resolutions and agreements. Thequestion is who, and under what rights may a member whether insider oroutsider, be able to enforce these articles. The contractual nature thearticles of association hold is profound within a company in order to haveeffect on its members. Article 112 of the CA 2006 defines what a member iswithin a company which is those who are entered in its register.
Significantly,the articles are what provide and include a contract between the company andits members. As abovementioned, in the case of Hickman, the articlesmust be treated as a statutory agreement or contract between its members andthe association. This provides that activities made in mala fide otherwise known as bad faith, may have beencommitted prior Joint Stock Companies Act 1844 which would make it difficult torecognise6.In Davis’ view, both statutory and ordinary contracts are alike when enforcingarticles of association7.
It is well recognised however, thatthis so called ‘statutory contract’ differs in a number of significant respectsfrom a standard contract8. Unders.33 (1) of the CA 2006, the provisions of a company’s constitution bind thecompany and its members to the same extent as if there were covenants on thepart of the company and of each member to observe those provisions. Therefore,the principle in Hickman was the drive for how outsider rights wouldpossibly be enforceable as Professer Gower had interpreted. As abovementioned, itis important to comprehend how the articles of association can be enforced butmost importantly, by whom. One may argue that only members with insider rightswithin the company are those who can enforce the articles of association,others may argue that it should be all who can enforce the provisions and somemay say it doesn’t matter.
Thus, though ordinary and statutory contracts may seemsimilar, they have very distinctive features which elevates the fact that whatmembers and insider rights may enforce, does not apply for those of outsiderrights. So, the principle held in Hickman is substantial, likewise therule in Eley v Positive Government Security-LifeAssurance Co Ltdin9 which held that a statutory contract only binds those whowere members and insiders of a company. This specific case had regarded amember who was supposed to be appointed solicitor but had not been thus, attemptedto sue as a breach of that clause. Nevertheless, as they were not a solicitor,they were not capable of enforcing the articles of association provision.Consequently, the rule in Eley was not applicable to outsiders which correspondswith Hickman.
Articulating back to Hickman, the case of Brownev La Trinadad10,was apparent as the agreement was incorporated with and shall be construed aspart of the articles which clarified whether a contract between the shareholderand the company, as to a matter not connected with the holding of shares, shouldarise yet was decided that he could not enforce the right to be a director11.The controversial issue is whether Mr Browne was capable of enforcing thearticles of association as a member, which is apparent and is discussed in relevantcases below. Correspondingly, GlobalinkTelcommunications Ltd v Wilmbury Ltd12 and Beattie Ev F Beattie Ltd13,elucidated more on the rule that outsider’s rights are not capable of enforcingthe articles of association.
Both of these cases involve the right to be acompany director in which the matter arose under their contract of employment. Theircontract however, was a different contract thus, not subject to the attributionclauses in the articles. Gloablink only binds the company if theprovision is contained in a separate contract between the company and officer14.In spite of this, it tends to be somewhat controversial as Beattiesuggests, that had the action been framed as a director-member action in whichthe central issue was a member suing to enforce the articles which had thetangential effect of enforcing outsider right, it may have been successful15.The controversy continues as House of Lords had stated in the case of Quin& Axtens Ltd v Salmon16, that theoutsiders right may enforce the articles of association provisions. In the caseof Quin17,he was capable to enforcing outsider rights indirectly by suing as a memberinstead of a director and the court viewed the issue in terms of enforcing amember right, which tangentially affects his right as a director rather than inthe Beattie case18. If one is an insider however, theirinsider rights allow them to possibly enforce the articles of association asthe court in Pender v Lushington19held the shareholders right to vote should not be interfered with and like LordJessel MR illustrated that “interference with a personal right created botha derivative claim and a personal action”.
Just as significant is the decision held in Re RichmondFate Property Co where Mr Walker who was appointed director under article 9of the articles of association within that company, was refused by Mr Plowman ameruit due to his contract already fixed at a certain amount20. MrWalker could not be bound in an ‘outsider’ capacity; but the company couldenforce against him his ‘express contract’ as a member21. Thecompany can prevent the member from compelling it to depart from its articles,even if they’re an outsider22.
Quinhere was relied on as the company may rely on enforcing the articles ofassociation on a member. This therefore meant that it is a similar effect tothe rights of an outsider whether the company or a member was enforcing thearticles of association. 1Alan Dignam and John Lowry, Company Law, (9th edn, OxfordUniversity Press 2014) 146.2(1915) 1 Ch. 881.3L.
C.B.G, ‘The contractual Effect of Articles of Association’ Modern LawReview Vol 21, No 4 (1985) 401.4Ibid 1, 159.
5(1965) 1 WLR 3356Ibid 1.7Paul L. Davis, Gower andDavis: The Principles of Modern Company Law (8th edn, Sweet 2008).8The Law CommissionShareholder Remedies 2.9, 20.9(1876) 1 Ex D 8810(1887) 37 Ch D 111Ibid 1,154.12(2002) AII ER13(1938) Ch 708 (CA)14Ibid 1, 155.15Ibid 1, 155.16(1909) AC 44217Ibid 16.18Ibid 1, 155.19(1877) 6 Ch D 7020D Marshall Evans, ‘Quantum Meruit and the Managing Director’ The ModernLaw Review Vol 29, No.6 (1966).21 Ibid20.22 Ibid20.