In Eley v. Positive Life Assurance Co, the articles of association contained a clause in which it was stated that the plaintiff, a solicitor, should be the solicitor to the company and transact its legal business. The articles were registered and the company incorporated, and eleven months later the plaintiff became a member. The plaintiff was not appointed solicitor by any resolution of the directors, not by any instrument bearing the seal of the company, but he acted as such for a time. Subsequently the company ceased to employ him and he brought an action for breach of contract against the company for not employing him as its solicitor.
In Browne v La Trinidad before the formation of the company an agreement was entered into between Browne and a person as trustee for the intended company, by which it was stipulated that Browne swhould be director and should not be removable till 1888. It was held that treating the agreement as embodied in the articles, still there was no contract between Browne and the company that he should be removed from being director, the articles being only a contract between the members inter se, and not between Browne and the company.
Now in these four cases the article relied upon purported to give specific contractual rights to persons in some capacity other than that of shareholder, and in none of them were members seeking to enforce or protect rights given to them as members, in common with the other corporators.
An outsider 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 favor 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.
The language of some of the judgments appears, however, to go further, as recognized, for instance, by Sargant J. In re Famatina Development Corporation, s.14(1), of the Consolidation Act, which is in the same terms as s. 16 of the Companies Act, 1862, 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, but the section cannot mean that the company is not to be bound when it says it is to be bound. Much of the difficulty is removed if the company be regarded, as the framers of the section may very well have so regarded it, as being treated in law as a party to its own memorandum and articles.
It seems clear from other authorities that a company is entitled as against its members to enforce and restrain breaches of its regulations. As in MacDougall v. Gardiner, Pender v. Lushington and Imperial Hydropathic Hotel Co., Blackpool v. Hampson it was held by Bowen L.J said, "…The articles of association, by s. 16, are to bind all the company and all the shareholders as much as if they had all put their seals to them…"
It is also clear from many authorities that shareholders as against their company can enforce and restrain breaches of its regulations, and in many of these cases judicial expressions of opinion appear, which, in my judgment, it is impossible to disregard.
In Johnson v. Lyttle's Iron Agency, in an action by a shareholder against the company, James L.J. held "…The notice ....did not comply strictly with the provisions of the contract between the company and the shareholders which is contained in the regulations of table A…"
In Bradford Banking Co. v. Briggs, the articles gave the defendant company a lien on its members' shares. The plaintiffs, who were equitable mortgagees of certain shares, brought an action against the mortgagors and the company to enforce their security. The company claimed priority for their lien. Lord Blackburn said, "…the only one of the articles of association which I think it material to notice is the 103rd article … I think it bound’s to the company as much as if he had at the time he became holder of these shares executed a covenant to the company in the same terms as article 103, but I do not think it was bound any further…"
In Wood v. Odessa Waterworks Co, which was an action by the plaintiff on behalf of himself and all other shareholders against the company, Stirling J. said,"…The articles of association constitute a contract not merely between the shareholders and the company, but between each individual shareholder and every other..."
In Salmon v Quin & Axtens Ltd, Farwell LJ, referring to this last statement, said, "…I think that that is accurate subject to this observation, that it may well be that the Court would not enforce the covenant as between individual shareholders in most cases..."
In Welton v. Saffery, Lord Herschell, who dissented on the main question from the rest of the House, made the following general observation, ‘…Sect. 16 of the Act of 1862 provides that the articles of association, when registered, shall bind the company and the members. Thereof to the same extent as if each member had signed his name and affixed his seal thereto…’
In all these last mentioned cases the respective articles sought to be enforced related to the rights and obligations of the members generally as such and not to rights of the character dealt with in the four authorities first above referred to by Astbury J
The controversy centered on three related questions,
‘Who were the parties to the statutory contract, the members and the company, or just the members?’
‘Where the members deemed to have covenanted with eah other, or with the company, or both?’
‘Could one member sue another directly on the contract, or could he enforce the statutory rights only through the company?’
It is now settled that the company should be treated as a party to the contract contained in its own memorandum and articles as in Hickman’s case and that the contract may contain rights which are directly enforceable by one member against another as held in Rayfield v Hands although on the latter point much may depend on what it is exactly that the right purports to confers.
Astbury J paid little regard to the actual ratio decidendi of some of them, and added a gloss to section which appears to contradict its express wording, ‘all the provisions of the memorandum and articles of association ‘this view was supported by R Gregory agues that for these reason the decision in Hickman’s case is insupportable and that it should be reconsidered despite its long acceptance. It is really quite remarkable that so shaky a first instance decision has been tacitly accepted for the great part of a century and endorsed without any discussion by the Court of Appeal in Beattie v E & F Beattie Ltd [1938], the court held that since the defendant was being sued as a director and no that of a member, he could not rely on the statutory contract.
Hickman’s case may have laid some earlier controversies to rest, but it has generated several new ones of its own. First, there are a number of cases which it is not easy to reconcile with the ‘qua member ‘rule’; in the cases of Imperial Hydropathic Hotel Co, Blackpool v Hampson, Quin & Axtens Ltd v Salmon. In each of these rights more in nature of management rights than shareholder rights were enforced.
R. Gregory traced the difficulties of the s.14 contract to the fact that the older case law was confused and concerned with whether or not s.14 constituted a contract or not whether outsider rights are enforceable. R. Gregory comes down in the favor of Lord Wedderburn’s view of that the outsider rights are enforceable. Lord Wedderburn [1957] had sought to resolve the problem by saying that a member can sue under s. 14 to enforce his right to have all the provisions of the corporate constitution observed, even where this would have the consequence of indirectly enforcing outsider rights, as so long they are sue in the capacity as a member.
GD Goldberg (1972)view of the problem was that the member’s statutory contractual right to that of having the company’s affairs conducted by the particular organ of the company which is specified as the appropriate body in the Act or in the memorandum or articles of association. In addition, R.R Duray, ‘The Relative Nature of a Shareholder’s Right to Enforce the Company Contract’, has acknowledged, usually without much debate, the basic principle that this article is contractual in its nature.
S.14 was enacted to cover gap which was thought to have created when the memorandum and articles replaced the deed of settlement in 1856. In modern time conditions may be regarded as questionable, for it perpetuates the notion that the only constituents of a company are it shareholders whose interest in the company and its constituent are arguably quite as a straitjacket characteristically a 19th century approach to many legal questions which is far from appropriate.
A similar gloss was put by the Courts on Companies Act 1948, s 210, a member bringing a complaint to the court under the section had to show that the conduct in question affected him qua member. S.459 has been re worded so as to meet many of the criticism which was leveled at s.210, but no attempt was made to deal with this point. The judges have accordingly been obliged to construe the new section in the same way but some flexibility has been achieved by giving a fairly broad meaning to the concept of a membership. In Ebrahimi v Westbourne Galleries Ltd, the House of Lords did nit feel constrained to put the same restriction on the statutory provision which allows a member to petition to have the company wound up.
It is not possible to say that every right which the memorandum or articles purport to confer on a member is enforceable in the absolute sense. In Foss v Harbottle (1843) under the shareholder may find that he has no access to the court unless he can carry the majority along with him. Any claim that s.14 gives a member a ‘right’ to have the terms of the constitution observed is defective unless it acknowledges that the right is qualified.
As the controversies have been recognised by Parliament they have introduced the Companies Act 2006.
Within this the statutory contract now lies in Section 33, which reads:
‘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 the provisions’
In s.33 that ‘on the part of the company and of each member to observe the provisions’ as opposed to the debate inviting ‘respectively had been signed and sealed by each member, and contained covenant on the part of each member to observe all provisions of the memorandum of articles’
The foregoing indicate that the courts, in drawing a distinction between breaches of the corporate constitution which provide an individual shareholder with standing to sue and those who cannot, have taken an approach which can be justified by taking into account the dynamics at work in companies. The quality of the jurisprudence is not beyond reproach. In terms of statutory interpretation, the judiciary has ignored the express wording of s.14, which states that the statutory contract extends to ‘all provision of the memorandum and articles of association’ this was supported by R. Gregory.
There is change in s.33 that as opposed to section 14(1) using the words ‘memorandum and articles’, s. 33 uses ‘company’s constitution’.
The controversy the case of Hickman was conflicting by Quinn and Axtens. Lord Wedderburn based his thoughts upon the case of Quinn and Axtens in opposition of Astburys judgment in Hickman. Goldbergs resigned with his middle path, stating that all articles of appointment are interests for shareholders as well as members.
Outsider rights in articles are within the scope of s. 20, since if this was not the case than a line of cases starting with ‘qua member’ cases would not be taken a precedent. s. 20 statutory contracts was taken in McKewan, where he stated it is not a part of the duty of courts to find reasons to avoid contracts. Rather it is their duty to support those contracts and to not avoid them. There is simply too much authority for outsider rights to be ruled as unenforceable.
In the Eley case should had been treated as authority for one principle which was not even represented in any of those judgments. Astbury J less consideration of past cases in Hickman, and his overruling of Hampson was worthy of credit.
R Gregory (1981) 44 MLR 526