Articles of Association

The nature of articles

Articles cannot override and overrule
any provisions in the memorandum.
Ashbury Railway Carriage and Iron
Co. Ltd v. Riche
A clause in the articles which allowed
an extension of the companys
business beyond or for other than
the objects or purposes expressed or
implied in the memorandum of
association was said to be entirely
nugatory.

READ
Contents of articles
Signature of subscribers to
memorandum
Members right to have copy of
articles
Necessity of articles
Construction of articles

Binding Effects of Articles

Binding as if signed and sealed
The binding effects of articles emerge from
section 33(1), which provides:S.33(1): subject to this Act the memorandum
and articles shall when registered bind the
company and the members thereof to the
same extent as if they respectively had
been signed and sealed by each member
and contained covenants on the part of
each member to observe all the provisions
of the memorandum and of the articles.

 By virtue of this, the essential effect of

s.33(1) is that provisions in the
memorandum and articles of a company
when registered become a statutory
contract of a special nature:1. Binding between the company and the
members qua members; and
2. Binding between the members inter se.
. The articles of a company constitute a
statutory contract of a special nature
which is not defeasible on the grounds
of misrepresentation, mistake, undue
infkuence and duress.

 It is incapable of being rectified by

the court on the grounds of mistake
since its binding force is derived not
from a privte bargin reached
between the parties, but from the
terms of the Act.
This kind of statutory contract, as
observed by McHugh abd Gummow
JJ. In:Bailey v. New South Wales Medical
Defence Union Ltd
It was an unusual type of contract

1. The members are deemed to have

contracted on the basis that, since
the articles, and in general the
memorandum, can be altered by
special resolution of the company,
the terms of the contract are
variable from time to time without
agreement of both parties to that
variation.
2. There is no justification in a court of
equity to rectify the articles of
association even if they do not
accord with the concurrent intention

3. The direct enforcement by a

member of rights under such a
contract against the company may
have to overcome obstacles placed
in its path by the rule in Foss v.
Harbotte.
4. Whilst a contract binds those who
made it and their personal
representatives, the articles in a
company limited by shares bind the
owners thereof for the time being
and the obligations imposed by the
deemed covenant are appurtenant

5. The view has been taken, not

without doubt, that in the absence
of some other statutory provision,
the effect of the decision in
Houldsworth v. City of Glasgow Bank
is to preclude a member of a
company limited by shares from
suing the company for damages for
breach of contract whilst still a
member and without seeking
rescission of the contract whereby
the shares were obtained.

Binding between company and members qua members

The words in section 33(1) are as if they (the

memorandum and articles) respectively had
been signed and sealed by each member
The section does not say that (as if) the
memorandum and articles had been signed
and sealed by the company, thus giving rise
to the uncertainty whether the company is to
be treated as a contracting party to the
memorandum and articles.
The uncertainty can be removed if the
company is treated in law as a party to its
own memorandum and articles.


Hickman v. Kent or Romney Marsh Sheepbreeders Association

The wording of section 14(1) of the English

Companies (Consolidation) Act 1908
(substantially similar to section 33(1) of the
Act) is difficult to construe or understand.
A company cannot in the ordinary course be
bound otherwise than by statute or contract
and it is in this section that its obligation
must be found.
As far as the members are concerned, the
section does not say with whom they are to
be deemed to have covenanted, .
[continue]

 .. But the section cannot mean that the

company is not to be bound when it says
it is tp be bound, as if & c, not can the
section mean that the members are to be
under obligation to the company under
the articles in which their rights and
duties as corporators are to be found.
Much if the difficulty is removed if the
company be regarded, as the frames of
the section may very well have so
regarded it, as being treated in law as a
party to its own memorandum and
articles.

 Wood v. Odessa Waterworks Co

A member of a company successfully

obtained an injuction to prevent the
company from implementing an ordinary
resolution which was passed to pay a
dividend by way of debenture-bonds
bearing interest redeemable at par by an
annual drawing extending over 30 years.
In that case, the articles empowered the
company to declare a dividend to be paid.
Upon true construction of the articles, the
court held that the phrase tp be paid
meant, prima facie, to be paid in cash.

 The debenture-bonds were not

payments in case, but were merely
agreements or promises to pay.
Stirling J. in that case stated: The articles of association constitute
a contract not merely between the
shareholders and the company, but
between such individual shareholder
and every other.

Binding between members inter se

The registered memorandum and articles of a
company, constitute a contract not merely
between the company and its members qua
members but also between each individual
member inter se.
Wong Kim Fatt v. Leong & Co. Sdn Bhd & Anor
In this case, Chang Min Tat J. stated:whatever the sympathies evoked by the sight
of a slingless David confronted by a Goliath,
there are in my view no facts amd no
circumstances raising up any eqquity against
the second defendant. It is purely a matter of
contractual obligation and the plaintiff must be
held to the obligations he had undertaken.

 Rayfield v. Hands & Ors

The articles of a company included a

provision entitling every member to
sell his shares to the directors of the
company at a fair valuation.
It was held that the obligations
imposed by the articles on the
directors were enforceable.
Vaisey J. held that the obligations
were imposed on the directors in
their capacity as members of the
company.

The qua member concept

Section 33(1) stated that the registered

memorandum and articles of a company
have no contractual force in so far as they
purport to confer rights or obligations on a
member otherwise than in their capacity
as a member.
The word members in this section means
members in their capacity as members.
That is, excluding any relationship which
does not flow from the membership itself.
This concept is expressed in such phrases
as qua member and member as such.

 In other words, section 33(1) regulates the

position of a member as a member of the
company and not in his capacity as an
individual.
It was once stated that the purpose of the
memorandum and articles was define the
position of the member as member, not to
bind him in his capacity as an individual.
It cannot be disputed that a member may
deal with his company on matters unrelated
to his membership.
A member may also contract individually
with the company upon terms which may or
may not be defined by reference to the
articles.

 Such a contract is usually called a special

contract.
Yet again the articles may stipulate the rights or
benefits conferred on individuals not in the
capacity of members of the company but, for
example, in respect of matters connected with
the administration or conduct of its business.
Eley v. The Positive Government Security Life
Assurance Co. Lyd
Article 118 of the article of a company provided
that one William Eley should be the solicitor to
the company and should transact at all the legal
business of the company, for the usual and
accustomed fees and charges and should not be
removed from his office unless for misconduct.

 No resolution was ever passed by the

directors appointing Eley as solicitor
to the company or arranging the
term of his employment, neither was
Eley appointed at any meeting of the
company or by any instrument
bearing the seal of the company.
After a time, the company ceased to
employ Eley and instead emploed
other solicitors to carry out the legal
businessof the company.
Eley brought an action against the
company for breach of contract in

 It was hrld that the articles taken by

themselves were simply a contract
between the members, inter se, and
did not creat any contract with Eley.
Lord Cairns L.C. in that case referred
to the articles as an agreement inter
socias, and said that it is res inter
alios acta, the plaintiff is no party to
it

 Beattie v. E & F Beattie Ltd

The defendant, a member and a director,

was sued by his company for the return of a
certain sum which it was alleged had been
improperly paid by way of remuneration.
The defendant sought to invoke an
arbitration clause contained in the articles
to stay part of the action.
The court ruled that the real matter which
was to be litigated was a dispute between
the company and the defendant in his
capacity as a director.

 Since the defendant was being sued in his

capacity as director and not as a member,
he could not rely on the statutory contract
notwithstanding the fact that the
defendant happened to be a member.
Lord Greene M.R. stated: But it appears to me that this much, at any
rate, is good law; that the contractual force
given to the articles of association by the
section (20 of the English Companies Act
1929) is limited to such provisions of the
articles as apply to the relationship of the
members in their capacity as members.

 Soden v. British & Cpmmonwealth Holdings

In the case of directors fees, it is now
established that directors fees are not due
to a director in his character as a member
even where the articles of a company
require a director to hold share qualification
and provides for the remuneration of the
directors.
Although membership is a necessary
qualification for appointment as a director,
the cause of action to recover the
remuneration is not based on the rights of a
member but on a separate contract to pay
remuneration.

 The inapplicability of the qua member

concept extends to an outsider. An outsider
cannot invoke a clause in the articles to
exert his rights to bind the company.
Hickman v. Kent or Romney Marsh
Sheepbreeders Association
Astbury J stated that:The actual decisions amount to this, an
outsdier to whom rights purport to be given
by the articles in his capacity as such
outsider, whether he is or subsequently
becomes a member, cannot sue on those
articles treating them as contracts between
himself and the company to enforce those
rights.

 Those rights are not part of the

general regulations of the company
applicable alike to all shareholders
and can only exist by virtue of some
contract between such person and
the company, and the subsequent
allotment of shares to an outsider in
whose favour such an article is
inserted does not enable him to sue
the company on such an article to
enforce rights which are res inter
alios acta and not part of the general
rights of the corporators as such.

 His Lordship then proceeded tp formulate

the following general principles:1. that no articles can constitute a cotract
between a company and a third person;
2. That no right merely purporting to be given
by an article to a person, whether a
member or not, in a capacity other than
that of a member, as, for instance, as
solicitor, promoter, director, can be
enforced against the company; and
3. That articles regulating the rights and
obligations of the members generally as
such do create rights and obligations
between them and the company
respectively.

The concept of contract by

incorporation

The concept of qua member confines the

enforceability of the registered memorandum
and articles as between a company and
members acting in their capacity as members.
Further, in the case of a non-member, even if
the articles contain provisions conferring nonmembership rights on the non-member, those
provisions are not enforceable by the nonmember against the company.
However, on a number of occasions the courts
have successfully incorporated the articles of a
company as evidence of the terms of a contract
between the company and non-member.

 Swabey v. Port Darwin Gold

Mining
Co
The
directors had served the company
without any express contract of service.
An article provided for remuneration at a
fixed rate per annum.
The company purported to reduce this by
retrospectives special resolution.
It was hed that although the articles did not
themselves constitute a contract between
the company and the directors,
nevertheless the terms of the articles could
be incorporated into the contract between
the company and the directors.

 The articles did not themselves form

the contract, but from them one
obtained the terms upon which the
directors were serving.
Re International Cable Co Ltd, ex
parte Official Liquidator
Where his Lordship held that the
directors of a company had duly
acted as directors amd were entitled
to their remuneration as provided
under the articles of the company.

 New British Iron Co. ex parte

Beckwith

The articles there provided that the

remuneration of the directors should be
annual sum of L1000.
The directors were employed and
accepted office on the footing of the
articles but without any express
agreement for remuneration.
For some time the directors, who were
also members, acted as directors of the
company, but were not paid.
The company went into liquidation.

 The directors successfully claimed arrears of

fees on the basis that a contract incorporating
the terms of the articles was to be inferred and
the directors were entitled to recover the
arrears of remuneration.
Shalfoon v. Cheddar Valley Co-operative Dairy
Co.Ltd
Salmond J. said that: moreover, there is no legal reason why the
terms on which a company so proposes to
contract wither with strangers or with its own
members should not be set out in the document
known as the articles of association. In such a
case,..[continue]

 On the existence of the contract being proved

aliunde in the individual instance, the articles of
association can be referred to as evidence of the
terms of the contract.
For instance, it is not uncommon for articles of
association to provide that the directors of the
company shall acquire or posses a certain
number of shares as a qualification for their
office.
Such a clause is not in itself a binsing regulation
imposing any enforceable obligation upon the
directors to acquire such shares; but it is
operative as the basis of an express or implied
contract made by each director with the
company when he accepts office contract, that is
say, that he will acquire the qualification shares
prescribed by the articles.

 On the other hand, where the articles

provide for the authority of the board
to be obtained for the payment of
special remuneration, then a
payment of the special remuneration
to a director without the authority
from the board will be invalid.
A director accepts his office subject
to and with the benefit of the
provisions of the articles relating to
directors.
A director who does not read the
articles or a director who

Alteration of Articles

Statutory provison [s.3(1)]: by

special resolution.
Relief under s.181
A member may apply to a court for
relief where a resolution or a
proposed resolution to alter the
articles would be unfairly
discriminatory or prejudicial to one or
more members or debentures
holders.

Principles of alteration
Alteration to be exercised bona fide
Allen v. Gold Reefs of West Africa Ltd
Lindley M.R stated that:. Must be exercised, not only in the manner
required by law, but also bona fide for the
benefit of the company as a whole, and it
must not be exceeded. These conditions are
always implied, and are seldom, if ever,
expressed. But if they are complied with I can
discover no ground for judicially putting any
other restrictions on the power conferred by
the section than those contained in it.

 Greenhalgh v. Arderne Cinemas

Where his Lordship stated that: in the first place, I think it is now plain that bona
fide for the benefit of the company as a whole
means not two things but one thing. It means that
the shareholder must proceed upon what, in hid
honest opinion, is for the benefit of the company as
a whole. The second thing is that the phrase the
company as a whole does not (at any rate in such
a case as the present) mean the company as a
commercial entity, distinct from the corporators; it
means the corporators as a general body. That is to
say, the case may be taken of an individual
hypothetical member and it may be asked whether
what is proposed is, in the honest opinion of those
who voted in its favour, for that persons benefit.

 Peters American Delicacy Co. Ltd v.

Heath & Ors
His Lordship stated that: the result of applying these principles is that the
special resolution altering the articles cannot be
declared to be invalid merely upon the ground that
the original articles conferred special rights upon the
holders of partly paid shares of which the alteration
deprived them, or upon the ground that the voting
holders of fully paid shares were interested in making
the alteration adversely to the holders of partly paid
shares. If, however, the resolution was passed
fraudulently or oppressively or was so extravagant
that no reasonable person could believe that it was
for the benefit of the company, it should be held to
be invalid.

Expropriation of shares

A subsequent alteration to the articles which has the

effect of expropriating the shares of the minority
may not be valid in the absence of circumstances
affecting the interests of the company.
Brown v. British Abrasive Wheel Co. Ltd
Astbury J held that:- The question therefore is whether the enforcement
of the proposed alteration on the minority is within
the ordinary principles of justice and whether it is for
the benefit of the company as a whole. I find it
difficult to follow how it can be justand equitable that
a majority, on failing to purchase the shares of a
minority by agreement, can take power to do so
compulsorily.

 The defendants contend that it is for

the benefit of the company as a
whole becaise in default of further
capital the company might have to
go into liquidation. The plaintiff is
willing to risk that. (The proposed
alteration) is merely for the benefit of
the majority. If passed the majority
may acquire all the shares and
provide further capital. That would
be for the benefit of the company as
then constituted. But the proposed
alteration is not for the present

 Sidebottom
A private company passed a special resolution
to alter its articles by introducing a power for
the directors to require any shreholders who
carried on any business which is ib direct
competition with the business of the company
to transfer their shares to nominees of the
directors.
There was evidence that the alteration was not
directed against the plaintiff.
The court helfd the alteration to be valid.
It was very much to the benefit pf the company
to get rid of members who are in competing
business.

 Dafen Tinplate
An alteration to the articles of a company
was proposed which would empower the
directors of the company in general meeting
to determine that the shares of any member
be offered for sale by the Board to such
person ot persons as the board shall think
fit at the fair value to be ascertained .
The plaintiff sought a declaration that the
alteration of the articles was void.
Peterson J. held that the alteration was
invalid because it was not established that
the alteration was for the benefit of the
company as a whole.

 His Lordship stated that: in my view it cannot be said that a power on the part
of the majority to expropriate any shareholder they may
think proper at their will and pleasure is for the benefit
of the company as a whole.
To say that such an unrestricted and unlimited power of
expropriation is for the benefit of the company appears
to me to be confusing the interests of the majority with
the benefit of the company as a whole.
In my opinion the power which, in this case, has been
conferred upon the majority of the shareholders by the
alteration of the articles of association in this case is too
wide and is not such a power as can be assumed by the
majority.
The power of compulsory acquisition by the majority of
shares which the owner does not desire to sell is not
lightly to be assumed whenever it pleases the majority
to do so.

Gambotto & Anor v. WCP Ltd & Anor

On appeal, the High Court of Australia allowed

the appeal and held that article 20A was invalid.
The majority felt that the test, for the benefit of
the company as a whole as established bu
Lindley M.R. in Allen v. Gold Reef of West Africa,
was not an appropriate test in a case which
involved the expropriation of shares of the
minority.
According to the majority, an alteration to the
articles of a company permitting the
expropriation of shares would be valid if both the
tests of fairness and proper purpose could be
satisfied.
fairness had both procedural and
substantiveelements in that:

 The first element, the process used to expropriate

must be fair, requires the majority shareholders to
disclose all relevant information leading up to the
alteration and it presumably requires the shares to
be valued by an independent expert
The second element, that the terms of expropriation
itself must be fair, is largely concerned with the
price offered for the shares. Thus, an expropriation
at less than market value is prima facie unfair , and
it would be unusual for a court to be satisfied that a
price substantially above market value was not a
fair value. That said, it is important to emphasise
that a shareholders interest cannot be valued solely
by the current market value of the shares. Whether
the price offered is fair depends on a variety of
factors, including assets, market value, dividens,
and the nature of the corporation and its likely
future.