Law and You > Corporate Laws > Companies Act, 2013 > Binding Force of Articles of Association
In this article, we shall discuss the binding force of articles of association between company and member and amongst members. Section 10 of the Companies Act, 2013 provides for the binding force of articles of association between company and member and amongst members. Section 10 of the Companies Act, 2013 makes it clear that the memorandum and articles shall when registered, bind the company and the members therof, as if it were a document signed by the company and each member of the company.
Binding Force of Articles of Association
Are articles binding on the company in relation to its members?
Yes, the articles are binding on the company in relation to its members.
In Wood v. Odessa Waterworks Co, (1889) 42 Ch D 636 case, issues were whether the memorandum and articles could constitute a contract between not just the company and its shareholders but also among shareholders and whether a minority shareholder could prevent a company from acting in a particular way. The articles of the company provided that the directors can declare a dividend to be paid to the members, with the sanction of the company at a general meeting. However, instead of paying the dividend to
the shareholders in cash, a resolution was passed to give them debenture bonds. It was finally held by the court, that the word “payment” referred to payment in cash, and the directors were thus restrained from acting on the resolution so passed.
In Shuttleworth vs Cox Bros and Co (Maidenhead) [1927] 1 Ch 154 case, the company’s articles provided for five people to be its directors for life unless disqualified in any of six specified ways. The articles were amended and seventh disqualifying circumstance was added. As a result, the directors were asked to resign when this seventh circumstance occurred. The director concerned claimed a declaration that he was still a director of the company. The Court held that the contract, if any, between the plaintiff and the company contained in the Articles in their original form was subject to the statutory power of alteration and if the alteration was bona fide for the benefit of the company, it was valid and there was no breach of that contract. There was no ground for saying that the alteration could not reasonably be considered for the benefit of the company, being no evidence of bad faith, there was no ground for questioning the decision of the shareholders about the alteration of Articles.
Are members of the company bound by the memorandum and articles in dealing with the company?
Yes, the members of the company are bound by the memorandum and articles in dealing with the company, because articles constitute a contract between each member and company. The members are bound because the members had all put their seals on them.
In Borland’s Trustees v. Steel Bros. & Co. Ltd., [1901] 1 Ch 279 case, the articles of the company provided that in the event of bankruptcy of any member, his shares would be sold at a price affixed by the directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell these shares at their original value and contended that he could do so since he was not bound by the articles. The issue was that whether the pre-emption rule created by the company related to shareholders’ bankruptcy went against bankruptcy laws and eventually void? The Court held that he was bound to abide by the company’s articles since the shares were bought as per the provisions of the articles.
In Bradford Banking Company v. Brigs, 1886, 12 A.C. 29 case, where the Articles provided that the company shall have a first charge on the shares for the debts due to it by members. One of the members owing money to the company borrowed money from the bank on the security of shares. The bank gave notice of deposit of shares to the company. It was held that the company has priority over the shares. Each members is not only bound by the covenants of memorandum and articles as originally framed but as altered from time to time in accordance with the provisions of the Companies Act. The articles of association are the regulations of the company binding on the company and on its shareholders. Further, the shareholders cannot among themselves enter into an agreement which is contrary to or inconsistent with the articles of association of the company.
In V.B. Rangraj v. V. B. Gopalakrishnan, AIR 1992 SC 453 case, where the issue was whether private agreements between shareholders can impose supplementary restrictions in addition to those provided in the articles. The Court held that such additional restrictions which are not mentioned in the articles would not be binding on the shareholders or on the company.
Are articles binding on the member in relation to other members?
Yes, articles are binding on the member in relation to other members of the company.
In the case of Rayfield v Hands, 1960 Ch 1 case, plaintiff was a shareholder in a particular company, who was required to inform directors if he intended to transfer his shares, and subsequently, the directors were required to buy those shares at a fair value. The plaintiff remained in adherence to the articles and informed the directors. The directors, however, contended that they were not bound to pay for his shares and the articles could not impose this obligation on them. The issue was did the articles give rise to contract between the plaintiff and the directors. The Court held that the articles related to relationship between the plaintiff as a member and the defendants not as directors but as members of the company. The Court, however, dismissed the directors’ argument and compelled them to buy Rayfield’s shares at a fair value.
Do the articles constitute a contract between an outsider on one side and the company or the members on the other side?
Pre-incorporation contracts are done before the incorporation of the company. Hence for pre-incorporation contracts, the company is stranger or outsider.
In Brown v. La Trinidad, (1887) 37 Ch D 1 case, the company sought to remove the plaintiff from his post after the incorporation, whereas the pre-incorporation agreement prohibited the same. The Court held that a pre-incorporation contract entered into by the company would not bind the company, subsequent to the incorporation of the company if the conditions of the pre-incorporation agreement have not been fulfilled by the other party and the company was held to be free to remove the plaintiff. Thus no outsider can enforce articles against a company, even if, such articles purport to confer certain rights on him. The following case clearly supports the argument that the articles contract only confers rights on members and not third parties.
In Eley v. Positive Government Security Life Assurance C. Ltd., (1876) Ex. D. 881 case, the plaintiff was a member of the company and was also employed as the company’s solicitor. Article 118 of the company’s constitution stated “Mr. William Eley of 27 New Broad Street, City of London, shall be the solicitor to the company…and he could not be removed from this post except on the ground of misconduct”. When the company ceased employing him as a solicitor, Eley brought an action claiming that the company constitution had been infringed. The Court held that there was no infringement as Eley was not suing as a member. Eley had not been employed as a member and the termination of work as a solicitor did not affect Eley’s status as a member of the company.
Do the Articles bind the members inter se?
The Memorandum and Articles do not constitute express contract between the members of the company. Yet each member is bound by these documents on the basis of an implied contract to the other members. The Articles regulate their rights inter se.
In Khusiram v. Hanutmal (1948) 53 CWN 505 case, where a member of a company had a private commercial dispute with another member. The Court held that he could not be so compelled to refer such a dispute to arbitration as provided by the articles of the company.
In Ramakrishna Industries (P) Ltd. vs P. R. Ramakrishnan, 1988 64 Comp Cas 425 Mad case, the Court held that the Articles bind the members inter se (i.e. one to another), as far as rights and duties arising out of the Articles are concerned. It is well settled that the Articles of Association will have a contractual force between the company and its members as also between members inter se in relation to their rights as such members.
In Welton vs Saffery [1897] AC 29 case, the Court held that it is quite true that the Articles constitute a contract between each member and the company and there is no contract in terms of between the individual members of the company but the Articles do not any the less, 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 no member has between himself and other members any right beyond that which the contract of the company gives.