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. Consequently, the CA 2006 Acthad superseded CA 1985. Alas, there have been arguments in need for reform of s.33contract under the CA 2006, especially with the almost unchanged wording23which is likely to not be fully fit for purpose in some cases.
This further provides that under s.21 of the CA 2006, the membersmay alter the articles by special resolution if voted by 75%. This is likelyhowever, to be in favour of the majority who can vote against the minority orvice versa, giving a more likely reason to not be fit for purpose for outsidersor 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 asto whether a member can enforce a right contained in the articles directlyagainst another member or whether the company is a proper claimant in such anaction25is ongoing. Vaisey J emphasises on the quasi-partnership nature of the company specifyingthat the company is a proper claimant in such an action presented in Rayfieldv Hands26. Arguably,recommendations by the Review Group Final Report have expressed the view that the law ought to berevised to bring it into line with best existing practice, encouraging directorsto look beyond and recognise the roles that relationships with otherstakeholders, such as employees, suppliers, customers and others affected bythe company’s commercial activities, play in the success of the company27.
Therefore,cases such as Globalink, Quin, and Beattie E could be providedwith an alternative proposition for the decisions made if s.33 was to be amendedmore than just the certain existing common law principles of directors’ dutiesthus, giving a likely reason to be fit for purpose. Evidently the White Paper’sformulation leaves the responsibilities about the company’s future where itshould be on the directors, not the courts28. The one who is capable of suingagainst another member or enforcing the articles of association under a s.33contract is another controversial issue as, outsiders may not enforce thearticles of association or sue for that matter. Jessel MR in Pender however,articulated that the shareholder is entitled to have his vote recorded as anindividual 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 ifit is, then the shareholders are able to sue30.
It is vaguehowever, due to there not being a limit as to how far personal rights are to betaken in order to sue, allowing a wide opportunity to enforce the articles ofassociation and unlikely to be fit for purpose. Notwithstanding, if this was tobe amended to restrict or narrow the chance of happening, it is likely to createa lacuna in the law which will have negative effect relying on principles suchas of Hickman or Eley for that matter. Even more so, the Company Law Review’s proposalthat all provisions should be enforced for those against members or the company31could likely be a sufficient idea to be fit for purpose for all membersproviding equality and an opportunity to any member with either insider oroutsider rights.
The contentious debatesregarding the rights of outsiders and insiders when enforcing the articles ofassociation under the ambiguity of s.33 of the CA 2006 are clear within caselaw predicting whether it does or does not matter. As established, the membersand company are bound by the articles of association yet, the recognisedambiguity of s.
33 does not spell out what rights are enforceable for bothinsider or outsiders regarding it unlikely to be fit for purpose. It ispossible that a reform of s.33 amplifying the rights of individuals properly tobe introduced providing a deeper interpretation of what a s.33 contract entailsfor 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 thecontracts of members within a company as identified in Hickman.
Therehave been opinions of thought in favour of outsiders enforcing the articles ofassociation such as the statement of Lord Wedderburn in Quin. Lord Wedderburn,in contrast to Professor Gower’s interpretation elucidated that contracts whichmembers hold and intend to use their rights, not only to sue another member orthe company itself, but to be able to enforce the articles of associationagainst another party32. Alas,the ambiguity of s.33 expressed by Nwafor that as the rights of the directors whomare seen to be ‘pillars’ of a company in Quin were affected, it is notideal that they may not have a statutory contract with the company33and elevate their duties. Even more so, the amendments which were proposed by LordWedderburn to s.33 which would have clarified the relationship between thecompany and the members, had been rejected by the Government due to the need offinding something which is ‘better and clearer’34. Similarly,in the case of Beattie E, it proposes that if the members’ rights toenforce the articles of association within a company must be a member quamember35. Theambiguity that is involved with the law today to provide the correct rights towhether be that members with insider or outsider rights, proves theunlikeliness for it to be fit for purpose.
This is due to it not currentlyhaving an exact form of a company’s constitution and in need for adjustments withinthe wording and the rights involved in order for a legal effect to be displayed.Through all the relevant case law such as of Hickman opposingoutsider rights and Quin, favouring that members with outsider rightscan enforce the articles of association, alongside the law up till date, notonly does it result to complexity and ambiguity, but due to the confusion, therehas been a propositioned decision which ultimately combines both Gower and Wedderburninterpretations. Professor Goldberg had spoken respectively of both Gower andWedderburn’s interpretations in his article but had elevated that Professor Gower’sinterpretation was too narrow and Lord Wedderburn’s interpretation was too wide36.
Goldberg had gonefurther to mentioning that enforcement of the articles of association foroutsider’s right will not be permitted unless the company has breached thestatutory contract towards the member37. Though Professor Gower,Wedderburn and Goldberg’s interpretations may solve certain issues within caselaw, along with the proposals of the Company Law Review, Review Group Final Report, and even WhitePaper on Modernising Company Law, they have not been finalised decisions and completelytaken into account. In spite of this, the current law is somewhat confusing andheavily biased depending on the individual facts that are brought forth withinevery case. Even LordWedderburn’s proposal of amending s.
33’s wording of the CA 2006 was due to CLRSG’s final report which provided asolution allowing all rights in the constitution to be enforced against thecompany and other members unless the constitution itself provides otherwise38.Perhaps there may be a possible outcome as mentioned earlier that elevates allthe members’ rights in the company who hold insider or outsider rights, such asin Eley, Quin or Beattie. Atiyah has expressed further that all partiesshould be capable of enforcing the articles of association against anotherparty39.Conclusively, it is important to fathom the fact thatthough the memorandum and the articles of association are evidently constitutedwithin s.33 CA 2006, the mere shift and difference that this act has broughtabout since the Companies Act 1985 (CA) has been biased due to case law.
Significantly, interpretations of Professor Gower in the evident case of Hickmanholds importance and seen to be the drive to outsiders not having the right toenforce the articles of association in comparison to Lord Wedderburn’s interpretationof, they can and should. As evidently debated, s.33 and its effect in relevantcase law is profound nonetheless, holds its cons in regard to the ambiguouscomplexity of the wording and perhaps the members’ outsider rights when wantingto enforce the articles of association regarding it unfit for purpose. Nwaforsupports this regarding the rights of the directors, likewise Shirazi statesthat members should be able to enforce the articles of association against another party. Others howeverhave argued s.
33 governing enforcement of articles of association is fit for purpose tthrough theway in which it is interpreted in Hickman and Eley which holdssignificance that a statutory contract only binds thosewho were members and insiders of a company. As a consequence of all thisdebate, it is suggestible that reforms are needed for insider and outsiderrights. 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 &Maxwell 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.
23Ibid 1, 152.24 Ibid1, 151.25Ibid 1, 151.26(1960) Ch 127Review Group Final Report.
28White Paper on ModernisingCompany Law – House of Commons, 7.29Ibid 1, 153.30Ibid 7, 2.39, 2031The Company Law Review.32Gideon Shirazi, ‘To what extent does the section 33 contract differ from anorthodox contract?’ Vol 34(2) (2013).
33Anthony O. Nwafor, ‘The Unending Debate on the Contractual Effect of theCompany’s Constitution – A Comperative Perspective’ (2013) InternationalCommercial Law Review.34Ibid 1.35G.
A Egert, ‘The Legal Effectof the Memorandum and articles of association of a company after theintroduction of the companies and securities legislation (Miscellaneous Amendments)Act 1985’ 49.36G.D Goldberg, ‘The enforcementof outsider-rights under section 20(1) of the Companies Act 1948’ The ModernLaw Review Vol 35.
No.4 (1972) 363.37 Ibid 35.38 Ibid1, 152.39 Ibid 32.