The clearly established in Hickman v Kent

The memorandum and the articles of association are
evidently constituted within the Companies Act 2006 (CA). It is important to
understand the extent to which a shift and difference has been brought about
since the Companies Act 1985 (CA). Distinctively, the articles of association consist
of a complex documentation including the shares of the company, rules and
powers of the directors, alongside the meetings within the company conducted1.
Further, it is clearly established in Hickman v Kent & Romney Marsh
Sheepbreeders Association2
that, the memorandum and the articles of association constitute a contract
between 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. To
add, it is important to comprehend whether it matters if an insider or an
outsider, may or may not enforce the articles of association. Significant to
note also, that under s.21 of the CA 2006, unless the company makes changes
which 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 Allen
v Gold Reefs of West Africa Ltd, a bona fide
so, done in good faith benefitting the company. Though this may seem
irrelevant, it actually holds significance towards outsider rights when needing
to enforce the articles of association such as in Re Richmond Gate Property Co5.This may signify
that being an insider or outsider of the company does not affect if the articles
of association can be enforced. Consequently, this will be discussed with the
importance of common law towards governing enforcement of the articles of
association in light of the view, if it fits for purpose.

 

Evidently, under section 17 of the CA 2006, unless the
context otherwise requires, references in the Companies Act to a company’s
constitution include the company’s articles, any resolutions and agreements. The
question is who, and under what rights may a member whether insider or
outsider, be able to enforce these articles. The contractual nature the
articles of association hold is profound within a company in order to have
effect on its members. Article 112 of the CA 2006 defines what a member is
within a company which is those who are entered in its register. Significantly,
the articles are what provide and include a contract between the company and
its members. As abovementioned, in the case of Hickman, the articles
must be treated as a statutory agreement or contract between its members and
the association. This provides that activities made in mala fide otherwise known as bad faith, may have been
committed prior Joint Stock Companies Act 1844 which would make it difficult to
recognise6.
In Davis’ view, both statutory and ordinary contracts are alike when enforcing
articles of association7. It is well recognised however, that
this so called ‘statutory contract’ differs in a number of significant respects
from a standard contract8. Under
s.33 (1) of the CA 2006, the provisions of a company’s constitution bind the
company and its members to the same extent as if there were covenants on the
part of the company and of each member to observe those provisions. Therefore,
the principle in Hickman was the drive for how outsider rights would
possibly be enforceable as Professer Gower had interpreted.

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As abovementioned, it
is important to comprehend how the articles of association can be enforced but
most importantly, by whom. One may argue that only members with insider rights
within 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 some
may say it doesn’t matter. Thus, though ordinary and statutory contracts may seem
similar, they have very distinctive features which elevates the fact that what
members and insider rights may enforce, does not apply for those of outsider
rights. So, the principle held in Hickman is substantial, likewise the
rule in Eley v Positive Government Security-Life
Assurance Co Ltdin9 which held that a statutory contract only binds those who
were members and insiders of a company. This specific case had regarded a
member who was supposed to be appointed solicitor but had not been thus, attempted
to 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 corresponds
with Hickman. Articulating back to Hickman, the case of Browne
v La Trinadad10,
was apparent as the agreement was incorporated with and shall be construed as
part of the articles which clarified whether a contract between the shareholder
and the company, as to a matter not connected with the holding of shares, should
arise 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 the
articles of association as a member, which is apparent and is discussed in relevant
cases below.  

Correspondingly, Globalink
Telcommunications Ltd v Wilmbury Ltd12 and Beattie E
v F Beattie Ltd13,
elucidated more on the rule that outsider’s rights are not capable of enforcing
the articles of association. Both of these cases involve the right to be a
company director in which the matter arose under their contract of employment. Their
contract however, was a different contract thus, not subject to the attribution
clauses in the articles. Gloablink only binds the company if the
provision is contained in a separate contract between the company and officer14.
In spite of this, it tends to be somewhat controversial as Beattie
suggests, that had the action been framed as a director-member action in which
the central issue was a member suing to enforce the articles which had the
tangential 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 the
outsiders right may enforce the articles of association provisions. In the case
of Quin17,
he was capable to enforcing outsider rights indirectly by suing as a member
instead of a director and the court viewed the issue in terms of enforcing a
member right, which tangentially affects his right as a director rather than in
the Beattie case18.
 If one is an insider however, their
insider rights allow them to possibly enforce the articles of association as
the court in Pender v Lushington19
held the shareholders right to vote should not be interfered with and like Lord
Jessel MR illustrated that “interference with a personal right created both
a derivative claim and a personal action”. Just as significant is the decision held in Re Richmond
Fate Property Co where Mr Walker who was appointed director under article 9
of the articles of association within that company, was refused by Mr Plowman a
meruit due to his contract already fixed at a certain amount20. Mr
Walker could not be bound in an ‘outsider’ capacity; but the company could
enforce against him his ‘express contract’ as a member21. The
company can prevent the member from compelling it to depart from its articles,
even if they’re an outsider22. Quin
here was relied on as the company may rely on enforcing the articles of
association on a member. This therefore meant that it is a similar effect to
the rights of an outsider whether the company or a member was enforcing the
articles of association.

Consequently, the CA 2006 Act
had superseded CA 1985. Alas, there have been arguments in need for reform of s.33
contract under the CA 2006, especially with the almost unchanged wording23
which is likely to not be fully fit for purpose in some cases. This further provides that under s.21 of the CA 2006, the members
may alter the articles by special resolution if voted by 75%. This is likely
however, to be in favour of the majority who can vote against the minority or
vice versa, giving a more likely reason to not be fit for purpose for outsiders
or insider rights enforcing the articles of association. Questionably, s.33(1)
contract is whether it binds the members ‘inter se’24. The judicial debate which has arose as
to whether a member can enforce a right contained in the articles directly
against another member or whether the company is a proper claimant in such an
action25
is ongoing. Vaisey J emphasises on the quasi-partnership nature of the company specifying
that the company is a proper claimant in such an action presented in Rayfield
v Hands26. Arguably,
recommendations by the Review Group Final Report have expressed the view that the law ought to be
revised to bring it into line with best existing practice, encouraging directors
to look beyond and recognise the roles that relationships with other
stakeholders, such as employees, suppliers, customers and others affected by
the company’s commercial activities, play in the success of the company27. Therefore,
cases such as Globalink, Quin, and Beattie E could be provided
with an alternative proposition for the decisions made if s.33 was to be amended
more than just the certain existing common law principles of directors’ duties
thus, giving a likely reason to be fit for purpose. Evidently the White Paper’s
formulation leaves the responsibilities about the company’s future where it
should be on the directors, not the courts28.

The one who is capable of suing
against another member or enforcing the articles of association under a s.33
contract is another controversial issue as, outsiders may not enforce the
articles of association or sue for that matter. Jessel MR in Pender however,
articulated that the shareholder is entitled to have his vote recorded as an
individual right in respect of which he has the right to sue29. Notably,
the final resort comes down to whether the contract is a personal right and if
it is, then the shareholders are able to sue30. It is vague
however, due to there not being a limit as to how far personal rights are to be
taken in order to sue, allowing a wide opportunity to enforce the articles of
association and unlikely to be fit for purpose. Notwithstanding, if this was to
be amended to restrict or narrow the chance of happening, it is likely to create
a lacuna in the law which will have negative effect relying on principles such
as of Hickman or Eley for that matter. Even more so, the Company Law Review’s proposal
that all provisions should be enforced for those against members or the company31
could likely be a sufficient idea to be fit for purpose for all members
providing equality and an opportunity to any member with either insider or
outsider rights.

The contentious debates
regarding the rights of outsiders and insiders when enforcing the articles of
association under the ambiguity of s.33 of the CA 2006 are clear within case
law predicting whether it does or does not matter. As established, the members
and company are bound by the articles of association yet, the recognised
ambiguity of s.33 does not spell out what rights are enforceable for both
insider or outsiders regarding it unlikely to be fit for purpose. It is
possible that a reform of s.33 amplifying the rights of individuals properly to
be introduced providing a deeper interpretation of what a s.33 contract entails
for when members do wish to enforce the articles of association. Nevertheless,
in comparison to s.14 CA 1985, it does provide a more stable ground to the
contracts of members within a company as identified in Hickman. There
have been opinions of thought in favour of outsiders enforcing the articles of
association such as the statement of Lord Wedderburn in Quin. Lord Wedderburn,
in contrast to Professor Gower’s interpretation elucidated that contracts which
members hold and intend to use their rights, not only to sue another member or
the company itself, but to be able to enforce the articles of association
against another party32. Alas,
the ambiguity of s.33 expressed by Nwafor that as the rights of the directors whom
are seen to be ‘pillars’ of a company in Quin were affected, it is not
ideal that they may not have a statutory contract with the company33
and elevate their duties. Even more so, the amendments which were proposed by Lord
Wedderburn to s.33 which would have clarified the relationship between the
company and the members, had been rejected by the Government due to the need of
finding something which is ‘better and clearer’34. Similarly,
in the case of Beattie E, it proposes that if the members’ rights to
enforce the articles of association within a company must be a member qua
member35. The
ambiguity that is involved with the law today to provide the correct rights to
whether be that members with insider or outsider rights, proves the
unlikeliness for it to be fit for purpose. This is due to it not currently
having an exact form of a company’s constitution and in need for adjustments within
the wording and the rights involved in order for a legal effect to be displayed.

Through all the relevant case law such as of Hickman opposing
outsider rights and Quin, favouring that members with outsider rights
can enforce the articles of association, alongside the law up till date, not
only does it result to complexity and ambiguity, but due to the confusion, there
has been a propositioned decision which ultimately combines both Gower and Wedderburn
interpretations. Professor Goldberg had spoken respectively of both Gower and
Wedderburn’s interpretations in his article but had elevated that Professor Gower’s
interpretation was too narrow and Lord Wedderburn’s interpretation was too wide36. Goldberg had gone
further to mentioning that enforcement of the articles of association for
outsider’s right will not be permitted unless the company has breached the
statutory contract towards the member37. Though Professor Gower,
Wedderburn and Goldberg’s interpretations may solve certain issues within case
law, along with the proposals of the Company Law Review, Review Group Final Report, and even White
Paper on Modernising Company Law, they have not been finalised decisions and completely
taken into account. In spite of this, the current law is somewhat confusing and
heavily biased depending on the individual facts that are brought forth within
every case. Even Lord
Wedderburn’s proposal of amending s.33’s wording of the CA 2006 was due to CLRSG’s final report which provided a
solution allowing all rights in the constitution to be enforced against the
company and other members unless the constitution itself provides otherwise38.
Perhaps there may be a possible outcome as mentioned earlier that elevates all
the members’ rights in the company who hold insider or outsider rights, such as
in Eley, Quin or Beattie. Atiyah has expressed further that all parties
should be capable of enforcing the articles of association against another
party39.

Conclusively, it is important to fathom the fact that
though the memorandum and the articles of association are evidently constituted
within s.33 CA 2006, the mere shift and difference that this act has brought
about since the Companies Act 1985 (CA) has been biased due to case law.
Significantly, interpretations of Professor Gower in the evident case of Hickman
holds importance and seen to be the drive to outsiders not having the right to
enforce the articles of association in comparison to Lord Wedderburn’s interpretation
of, they can and should. As evidently debated, s.33 and its effect in relevant
case law is profound nonetheless, holds its cons in regard to the ambiguous
complexity of the wording and perhaps the members’ outsider rights when wanting
to enforce the articles of association regarding it unfit for purpose. Nwafor
supports this regarding the rights of the directors, likewise Shirazi states
that members should be able to enforce the articles of association against another party. Others however
have argued s.33 governing enforcement of articles of association is fit for purpose tthrough the
way in which it is interpreted in Hickman and Eley which holds
significance that a statutory contract only binds those
who were members and insiders of a company. As a consequence of all this
debate, it is suggestible that reforms are needed for insider and outsider
rights.   

 

 

1Alan Dignam and John Lowry, Company Law, (9th edn, Oxford
University Press 2014) 146.

2(1915) 1 Ch. 881.

3L.C.B.G, ‘The contractual Effect of Articles of Association’ Modern Law
Review Vol 21, No 4 (1985) 401.

4Ibid 1, 159.

5(1965) 1 WLR 335

6Ibid 1.

7Paul L. Davis, Gower and
Davis: The Principles of Modern Company Law (8th edn, Sweet &
Maxwell 2008).

8The Law Commission
Shareholder Remedies 2.9, 20.

9(1876) 1 Ex D 88

10(1887) 37 Ch D 1

11Ibid 1,154.

12(2002) AII ER

13(1938) Ch 708 (CA)

14Ibid 1, 155.

15Ibid 1, 155.

16(1909) AC 442

17Ibid 16.

18Ibid 1, 155.

19(1877) 6 Ch D 70

20D Marshall Evans, ‘Quantum Meruit and the Managing Director’ The Modern
Law Review Vol 29, No.6 (1966).

21 Ibid
20.

22 Ibid
20.

23Ibid 1, 152.

24 Ibid
1, 151.

25Ibid 1, 151.

26(1960) Ch 1

27Review Group Final Report.

28White Paper on Modernising
Company Law – House of Commons, 7.

29Ibid 1, 153.

30Ibid 7, 2.39, 20

31The Company Law Review.

32Gideon Shirazi, ‘To what extent does the section 33 contract differ from an
orthodox contract?’ Vol 34(2) (2013).

33Anthony O. Nwafor, ‘The Unending Debate on the Contractual Effect of the
Company’s Constitution – A Comperative Perspective’ (2013) International
Commercial Law Review.

34Ibid 1.

35G.A Egert, ‘The Legal Effect
of the Memorandum and articles of association of a company after the
introduction of the companies and securities legislation (Miscellaneous Amendments)
Act 1985’ 49.

36G.D Goldberg, ‘The enforcement
of outsider-rights under section 20(1) of the Companies Act 1948’ The Modern
Law Review Vol 35. No.4 (1972) 363.

37 Ibid 35.

38 Ibid
1, 152.

39 Ibid 32.

x

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