ARTICLES OF ASSOCIATION II

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCE/FURTHER READING

INTRODUCTION:

The article of association is binding between the members and the company, and between the members inter se; i.e. between the members with each other. We may need to

look closely at this peculiar contractual obligation and determine to what extent and what basis will this be practicable we also have to look closely at the position of outsiders to the contract and who exactly are the outsiders? In circumstances where the members wish to enforce an article of association, what form of legal proceedings could be permitted under the law?

OBJECTIVES

At the end of this unit the student must be able to discuss, (1) the contract between members, (2) outsider rights, (3) who can maintain an action on the article of association.

MAIN CONTENT

1. A contract between the members

It is not clear whether the articles are binding as between members inter se,most pre- Hickman’s case says the article binds members inter se. in the case of Eley v

Positive Government Security Life Assurance Company (1876) 1 Ch.D. 88. The articles of the defendant company provided that the plaintiff be appointed as its solicitor.Eley worked in this capacity for a period of time before the company ceased to employ him. In an action for breach of contract, the House of Lords held that there was no contract between Eley and the company. The articles were binding between members, and although Eley was a member of the company, he was suing the company in his capacity as a solicitor. There was therefore no contract which Eley could enforce.

This case established quite a few principles, the fundamental issue resolved is that the article of association is only binding on the members and the company, and that no outsider is entitled to claim any right on the article. It follows that notwithstanding the fact that the solicitor was also a member of the company, the capacity in which he was instituting the action will determine whether he can enforce the articles or not.

Stirlin J in the case of Wood v Odessa Water Works Company (1889) 42 Ch.D. 636 at page 642, explained thus,

“that the article of association constitute a contract not merely between the company and the shareholders, but between each individual shareholder and every other.”

Lord Hershell however holds a contrary view when he said,

It is quite true that the articles constitute a contract between each member and the company, and that there is no contract between the individual members of the company, but the articles do not any less, in my opinion, regulate their rights inter se. such rights can only be enforced by or against a member through the company, or through the liquidators representing the company, but I think that no member has, as between himself and another member, any rights beyond that which the contract with the company gives.

In Salmon v Quin&Axtens Ltd (1909) AC 442, Farwell L.J considered Stirling J’s statement In Woods vOdessa Water Worksand stated,’ I think that is accurate subject to this observation, that it may well be that the court would not enforce this covenant as between the individual shareholders in most cases.

Some writers have supported the views expressed by Lord Herschell above. One of them is Barc and Bowel (1988) that in their view a member cannot enforce the articles of association of a company directly against another member unless the company is a quasi- partnership.

The proper claimant in such a situation is the company itself. However, Davies (2008) considers that a ‘direct action between the shareholders concerned is here possible; and for the law to insiston an action through the company would merely be to promote multiplicity  of actions, and involve the company in unnecessary litigation.

In England, the CLRSG in their final report recommended quite clearly that the members should be given the right to sue and enforce the articles without necessarily going through the company but the S33 of the 2006 Act failed to clear the issue and merely almost repeated the former position in section 14 of the 1985 Act. However, the position in Nigeria is better, under the S41 of the CAMA, the law has been clearly stated and even extended the  provisions to cover the rights of officers of the company. The members can therefore freely maintain can action as between themselves without recourse to the company.

Section 41(1) of CAMA states as follows, Subject to the provisions of this act,the memorandum and articles , when registered, shall have the effect of a contract under seal between the company and its members and officers and between the members and officers whereby they agree to observe and perform the provisions of the memorandum and articles , as altered from time to time in so far as they relate to the company, members, or officers as such.

It follows that in Nigeria rather than for the officer to sue as a member to enforce outsider right due to him as officer he is at liberty to commence action as an officer to enforce the articles.

OUTSIDER RIGHTS

We should further emphasize that ordinarily being a contract anyone who is not privy to the agreement cannot enforce the article of association. The parties to the contract are the members and the company; therefore anyone who is not a member cannot enforce the articles. It is possible for a member to be, not only a member but also an officer of the company, the question is that whether such a person can sue. The issue was resolved in the case of Eley v Positive Government Life Assurance Company (supra) that outsiders are not entitled to sue under the contract, and trough the member is also an officer, if he institutes the action in his capacity as on outsider or officer, in the case , he instituted the suit in his capacity as a solicitor to enforce his rights as a solicitor qua solicitor to the company, he is not entitled to do so. However, in cases where the clause in the article was made specifically for his benefit, like in the Eleys case, the court will still not allow him to maintain the action as the rule of privity of contract will not allow him to maintain the action.

In the case of Browne v LaTrinadad(1887)37 Ch. D 1 a shareholder who had a right  to be a director confirmed in the articles was removed by a valid resolution of the general meeting. The court placed emphasis on Eley’s case in concluding that “it would be remarkable that, upon the shares being allotted to him, a contract between him and the company, as to a matter not connected with the holding of shares, should arise. He therefore could not enforce a right to be a director.

In the Hickman’s case, the court considered the matter settled, and stated:

This much is clear, first, that no article can constitute a contract between the company and a third person, secondly, 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 far instance, as solicitor, promoter, director, can be enforced against the company; and thirdly, 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 only solution would have been as pointed out in the recent case of Globalink Telecommunications Ltd v Wilmbury Ltd (2003) 1 BCLC 145, where there was an indemnity provision on behalf of a director in the article, the court found that such provision would not be binding because the articles do not constitute a contract between the company and its officers; and that it will only be binding on the company if the provision is contained in a separate contract between the company and the officer.

It follows that directors qua directors are outsiders to the articles. When the article provides for the settlement of disputes between the company and members, this will not  cover disputes between the directors and the company.

In the case of Beattie v Beattie Ltd. (1938) Ch. 709, the company’s articles provided for any dispute between the members and the company to be referred to arbitration. There was a dispute between a director and the company, and it was held by the court that it was not governed by the articles. Although the director was a member, the dispute was in his capacity as director and therefore it cannot be referred to arbitration. The Court of Appeal relying on the Hickman’s case held that since the dispute relates to his status as director he cannot rely on the articles.The Master of Rolls in his judgment saw the issue as being framed as a director-member action in which the enforcement of the directors outsider rights were central rather than tangential. He suggested that had the action being framed as a member-director action in which the central issue was a member suing to enforce the articles which had the tangential effect of enforcing an outsider right it might have been successful. This view was supported by the court in the case of Salmon v Quin&Axtens supra, in this case, the articles of association provided that the consent of both managing directors was needed for certain decisions. Mr. Salmon was a managing director and member of the company and he dissented from a decision to buy and letting of property. The general meeting then passed a resolution authorizing the purchase and letting of the property. Mr. Salmon sued as a member to enforce the article requiring his consent as managing director to the transactions. In this case, the House of Lords accepted a general personal right of members to sue to enforce the articles by allowing a member to obtain an injunction to stop the completion of the transactions entered into in breach of the articles. Here the court agreed that since the member has a right to enforce the articles of association, then even if in the long run he will thereby enforce rights due to him as an outsider it is still within the ambit of the section.

Based on the case of Beattie and Salmon-Quin&Axtens, Lord Wedderbum in his article on Foss v Harbottleargued that the courts have a recognized a general right to sue by members in order to enforce the articles notwithstanding that they may be indirectly enforcing outsider rights. (see –Wedderburn, 1957, Shareholders Rights And The Rule In Foss V Harbottle, 1957, Camb. L.J. 193, 1958, Canb.L.J. 93).

Other writers agreed with their own reasons, see, Goldberg, 1972, The enforcement of Outsider Rights under section 20(1) of the Companies Act 1948, 1972 MLR 362, The Controversy on the Ssection 20 Contract Revisited, (1985) MLR 158.

Gregory, 1981, The Section 20 Contract (1981) 44 MLR 526, Prentice, 1980, The Enforcement of Outsider Rights (1980) 1 Colo 179.

Who Can Sue

A major issue is, who can sue on the contract?, and when and how could this be done? In the first instance, where the breach is personal to the member, then the member can sue to enforce the articles. In the case of woods v Odessa Water works (supra), in the case, the company planned to convert dividends payable to the members into bonds, a member objected since the articles do not allow dividends to be converted to bonds, it was held that since the articles constituted a contract between the shareholders and the company, a shareholder could by injunction restrain the company from acting in contravention, hence the individual member may sue to enforce his personal rights.

Where however, the claim is a collective one, the members that are aggrieved may maintain a representative action to enforce the provisions of the articles. In the case of Pender v Lushington (1877) 6 Ch.D. 70, where some members of a company were prevented from voting at the general meeting, by a director, the court held that the members may sue in a representative capacity to enforce their rights under the articles of association of the company.

See also Griffith v Paget (1877) 5 Ch.D 894.

We may safely conclude that the members are at liberty to enforce personal rights in the article, while common grievances may be enforced collectively through the representative action. However, it may be difficult to say in view of the rule in Foss v Harbottle which says that in an action where the company suffer any injury only the company can sue to enforce its rights. And, only the directors have the power to institute action on behalf of the company and in its name. It follows that where the wrong is done to the company only the company may sue to enforce its rights under the articles.

See Mozley v Alsten (1847) Macdougal v Grndiner (1875)

CONCLUSION

Articles of association is a contractual document binding the members and the company and the members inter Se. the relationship between the members is still doubtful, and the legislature in U.K. has not done much to change the situation.

SUMMARY

The article binds the members and the company. The courts in England have been reluctant to recognize the rights of outsiders to sue on the contract simply because of privity of contract. However, based on the courts decisions in Salmon, and Beattie cases we can assertively say that the member who is also on outsider may enforce the contract in his position as a member and if indirectly he is enforcing rights conferred on him as outsider, the company cannot object successfully.

TUTOR MARKED ASSIGNMENT

Discuss critically the effect of articles of association on the rights of members and outsiders.