The significance towards outsider rights when needing to
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
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
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.
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
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
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.
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
7Paul L. Davis, Gower and
Davis: The Principles of Modern Company Law (8th edn, Sweet &
8The Law Commission
Shareholder Remedies 2.9, 20.
9(1876) 1 Ex D 88
10(1887) 37 Ch D 1
12(2002) AII ER
13(1938) Ch 708 (CA)
14Ibid 1, 155.
15Ibid 1, 155.
16(1909) AC 442
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).