With importance concerning the proper interpretation of a

With a record 5.5 million businesses in
the 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. According
to S.183,
every company “must have articles of association.” The articles of association
form a company’s principle constitutional document under S.174 and
‘make up the most important constitutional document of a company under the CA
2006.’5 ‘A
company’s constitution aims to set out the powers, rights and obligations of
the company’s members and directors, and to lay down certain processes
regarding how the company is to be run.’6
The articles tend to regulate the internal workings of the company and
typically cover issues such as the balance of power between the members and
directors, the conduct of general meetings and certain issues regarding shares
and the distribution of assets. Therefore, a company’s constitution is vital as
it defines the company’s purpose and lays out how tasks are to be accomplished
within the organization. It can be said that a company’s constitution largely
fulfils the same purpose as a countries constitution.

The Hickman7
case was of particular importance concerning the proper interpretation of a
company’s articles, and whether a company member could be bound by its terms. Duly
the statement provided in the question will be critically evaluated.

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Preliminarily, the basic facts of the case
need to be explored to gain an overview of proceedings. Articles provided for
disputes between a member and the company to be referred to in arbitration. ‘A member
sued in court to enforce his rights as a member, including the right to have
his sheep registered.’8
Astbury J was tasked in the High Court to determine whether the company’s
constitution created a contract between the company and its members, or simply
between the members themselves. It was held that the constitution forms a
contract between the company and its members and therefore the member was bound
by the articles to arbitrate the dispute. The company was entitled to enforce
the arbitration clause in the articles against the member. This issue has since
been 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 and
its members…” Accordingly, S.33(1)11 ‘makes
it clear that a statutory contract is created by the articles of association’12 which
imposes obligations upon: ‘the company and its members, the members and the
company and the members themselves.’13

The Hickman case sought to resolve the inconsistencies
which existed in the subject matter of whether the courts will recognise all
clauses in the article and whether the court should enforce all clauses. Two opposing
cases can be identified. In Quin & Axtnes v Salomon14
the company’s articles allowed either managing director to veto the decision of
the board of directors. Salmon attempted to veto a decision, but the other
directors continued regardless and obtained an approval by ordinary resolution.
Salomon sought an injunction to prevent the act from continuing.15 It
was held that Salmon, as a member of the company was entitled to require the
company to abide by its articles as it was “an attempt to alter the terms of
the contract.”16
Accordingly, an injunction was granted. Salomon, a director and member of the
company, enforced an ‘outsider’ right by suing as a member to enforce the
articles. However, this is contrasted with the case of Eley v Positive Life
Association17;
Articles required the company to employ Eley as its solicitor. The company used
a different solicitor and Eley sued the company for breach of contract arguing
the articles formed a contract between himself and the company. The court ruled
that as the company solicitor or an ‘outsider’, Eley could not rely on or
enforce the articles which were a matter between the directors and
shareholders, and not between them and the plaintiff even though he later
became a member after the articles had been signed. Evidently the courts took
an inconsistent approach to whether certain provisions of the articles could be
enforced. ‘The courts had to find a way to give effect to validly incorporated
terms while at the same time ensure that the articles remained focussed on the corporate
constitution rather than the rights of individual shareholders.’18

The resolution which finally appeared in
the Hickman case provided some sort of filter mechanism which would draw the
line between acceptable and unacceptable clauses which the courts would or
wouldn’t recognise and enforce under S.33.19 Astbury
J clarified the law by designing a filter mechanism on the following three
points: ‘Firstly, no article can constitute a contract between the company and
a 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 be
enforced against the company. Thirdly, articles regulating the rights and
obligations of the members…do create rights and obligations between them and
the company.’20
The effect of this creates a two-fold test to assist in disputes: 1) who is
attempting 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 stage
that 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 a
member 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 (if
declared).    

1
Statistics at Companies House, Business statistics,
Chris Rhodes – 2016

2
The Companies Act 2006

3
The Companies Act 2006, S.18

4
The Companies Act
2006, S.17

5 Unlocking Company Law,
3rd Edition, Susan McLaughlin P142

6
Concentrate: Company Law, 4th Edition, Lee Roach, P48

7 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915 1
Ch 881

8 Unlocking Company Law, 3rd Edition, Susan McLaughlin P150

9 The Companies Act 2006, S.33(1)

10 The Companies Act 1985, S.14

11 The Companies Act 2006, S.33(1)

12 Unlocking Company Law,
3rd Edition, Susan McLaughlin P148

13 Concentrate: Company Law, 4th Edition, Lee
Roach, P51

14 Quin & Axtens Ltd V Salmon 1909 1 ch 311, AC 442

15 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html

16 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html

17 Eley v Positive Government Security Life Insurance Association
1876 1 Ex D 88

18 http://llbnotes.blogspot.co.uk/2011/11/company-law-formation-of-company-part-2.html

19 The Companies Act 2006, S.33

20 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association 1915 1
Ch 881

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