With a record 5.
5 million businesses inthe UK1,statute is necessary to regulate and guide companies. The Companies Act 20062(CA) is the primary legislation which governs company law in the UK. Accordingto S.183,every company “must have articles of association.” The articles of associationform a company’s principle constitutional document under S.174 and’make up the most important constitutional document of a company under the CA2006.’5 ‘Acompany’s constitution aims to set out the powers, rights and obligations ofthe company’s members and directors, and to lay down certain processesregarding how the company is to be run.
‘6The articles tend to regulate the internal workings of the company andtypically cover issues such as the balance of power between the members anddirectors, the conduct of general meetings and certain issues regarding sharesand the distribution of assets. Therefore, a company’s constitution is vital asit defines the company’s purpose and lays out how tasks are to be accomplishedwithin the organization. It can be said that a company’s constitution largelyfulfils the same purpose as a countries constitution. The Hickman7case was of particular importance concerning the proper interpretation of acompany’s articles, and whether a company member could be bound by its terms.
Dulythe statement provided in the question will be critically evaluated. Preliminarily, the basic facts of the caseneed to be explored to gain an overview of proceedings. Articles provided fordisputes between a member and the company to be referred to in arbitration. ‘A membersued in court to enforce his rights as a member, including the right to havehis sheep registered.’8Astbury J was tasked in the High Court to determine whether the company’sconstitution created a contract between the company and its members, or simplybetween the members themselves. It was held that the constitution forms acontract between the company and its members and therefore the member was boundby the articles to arbitrate the dispute. The company was entitled to enforcethe arbitration clause in the articles against the member.
This issue has sincebeen further clarified by statute through S.33(1)9(previously S.14 of the CA 198510)which states “The provisions of a company’s constitution bind the company andits members…” Accordingly, S.33(1)11 ‘makesit clear that a statutory contract is created by the articles of association’12 whichimposes obligations upon: ‘the company and its members, the members and thecompany and the members themselves.’13 The Hickman case sought to resolve the inconsistencieswhich existed in the subject matter of whether the courts will recognise allclauses in the article and whether the court should enforce all clauses. Two opposingcases can be identified. In Quin & Axtnes v Salomon14the company’s articles allowed either managing director to veto the decision ofthe board of directors.
Salmon attempted to veto a decision, but the otherdirectors continued regardless and obtained an approval by ordinary resolution.Salomon sought an injunction to prevent the act from continuing.15 Itwas held that Salmon, as a member of the company was entitled to require thecompany to abide by its articles as it was “an attempt to alter the terms ofthe contract.
“16Accordingly, an injunction was granted. Salomon, a director and member of thecompany, enforced an ‘outsider’ right by suing as a member to enforce thearticles. However, this is contrasted with the case of Eley v Positive LifeAssociation17;Articles required the company to employ Eley as its solicitor. The company useda different solicitor and Eley sued the company for breach of contract arguingthe articles formed a contract between himself and the company. The court ruledthat as the company solicitor or an ‘outsider’, Eley could not rely on orenforce the articles which were a matter between the directors andshareholders, and not between them and the plaintiff even though he laterbecame a member after the articles had been signed. Evidently the courts tookan inconsistent approach to whether certain provisions of the articles could beenforced.
‘The courts had to find a way to give effect to validly incorporatedterms while at the same time ensure that the articles remained focussed on the corporateconstitution rather than the rights of individual shareholders.’18The resolution which finally appeared inthe Hickman case provided some sort of filter mechanism which would draw theline between acceptable and unacceptable clauses which the courts would orwouldn’t recognise and enforce under S.33.19 AstburyJ clarified the law by designing a filter mechanism on the following threepoints: ‘Firstly, no article can constitute a contract between the company anda third person.
Secondly, no right merely purporting to be given by an article….whether a member or not, in a capacity other than that of member…. can beenforced against the company. Thirdly, articles regulating the rights andobligations of the members…do create rights and obligations between them andthe company.’20The effect of this creates a two-fold test to assist in disputes: 1) who isattempting to enforce a provision contained within the articles of association;2) what type of right is the individual trying to enforce? It is this second stagethat introduces, for the first time, the concept of ‘insider’ and ‘outsider’rights into company law. ‘Insider’ rights have been said to be those given to amember and include the right to attend a general meeting, the right to vote,the right to have a vote recorded and the right to receive a dividend (ifdeclared). 1Statistics at Companies House, Business statistics,Chris Rhodes – 20162The Companies Act 20063The Companies Act 2006, S.184The Companies Act2006, S.175 Unlocking Company Law,3rd Edition, Susan McLaughlin P1426Concentrate: Company Law, 4th Edition, Lee Roach, P487 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915 1Ch 8818 Unlocking Company Law, 3rd Edition, Susan McLaughlin P1509 The Companies Act 2006, S.33(1)10 The Companies Act 1985, S.1411 The Companies Act 2006, S.33(1)12 Unlocking Company Law,3rd Edition, Susan McLaughlin P14813 Concentrate: Company Law, 4th Edition, LeeRoach, P5114 Quin & Axtens Ltd V Salmon 1909 1 ch 311, AC 44215 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html16 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html17 Eley v Positive Government Security Life Insurance Association1876 1 Ex D 8818 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html19 The Companies Act 2006, S.3320 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915 1Ch 881