Enforcement of Rights given by Contracts between Members after Company Name Registration UK


15 Jan

The first requirement for a set up limited company companies house is to prepare the documents for submission to the registrar. These documents include articles of association and memorandum of the newly register limited company UK. Shareholders may sign contracts with one another at the time of company name registration UK. Such agreements have certain attributes, that may hold for all the shareholders’ agreements. One of them has been discussed in this article along with a case study for elaboration.

Effectivity of Section 33 of Companies Act 2006 on Members Contract

Whether the company is to get register limited company UK or the intentions are for UK plc company formation, it should be known that in both the cases the articles form a contractual binding on the company and on its members. Section 33 of Companies Act 2006 has the impact of binding the company and the members of the company, through the conditions specified in the articles of the company having any form of company formation such as UK plc company formation etc. However, the contract created by Section 33 has an impact on the members merely, in the scope of their membership, and the impact does not lie in any special or individual capacity, for example, in case of directors.

Case Study: Hickman v Kent

The company at defense had been formed as a non-profit corporate body. The 49th article of the company stated that whenever there was a dispute between corporation and its members, the dispute had to be taken to the arbiter. Hickman was a member of the corporation. He made use of this article by bringing action against different irregular conducts of the company. One of them was the rejection for registration of his sheep in the company’s published flock book. Also, he was threatened to get kicked out of the corporation’s membership. A stay order was given for the proceedings to the corporation on the basis that article 49 of the corporation, was an agreement for arbitration and implementable between the corporation and the members, by the virtue of the statutory clauses given by Section 33.

Astbury J held:

  • The defendants want a stay for the proceedings regarding an action taken under Section 4 of the Arbitration Act 1889. The defendant is under the threat of that action along with Chapman, their secretary. The claimant demands certain reliefs, injunction regarding issues that took place in the corporation. The claimant became the member of the corporation in 1905.
  • The 49th article is commonly found in private corporations. The objectives of this corporation as they are along with the members may get treated with prejudice through a public trial. And in case of failure of this summons, the provisions relevant to arbitration will prove of very trivial importance.
  • It is obvious to the authorities that when anyone submits the application for arbitration under the Arbitration Act 1889, then the courts have a responsibility to adopt such an agreement. In this case, the defendants argue that firstly, the way the 49th article deals with the members in their scope as members only, leads to a submission following the rules of Arbitration Act and secondly, the contract that was constituted by the application submitted to the corporation for the membership by the plaintiff and the acceptance given by the corporation, constitutes to this kind of submission.
  • Both of these propositions given by the defendants are countered by the plaintiff. This has raised many questions of great importance. First I will cater the question about the impact of article 49.

The Judge then analysed Section 14(1) of 1908 act which is now Section 33 of Companies Act 2006 and stated that:

  • The case studies like Pritchard’s, Melhado v Porto, Eley v Positive and Browne v La Trinidad, give their support to the view that company’s articles do not form any agreement between the members of the company and the company. In the case of Pritchard, a mining company’s articles stated that the company had to sign a contract with De Thierry, immediately after its formation. De Thierry was the vendor for auction of the mine for 2000 euros and 3200 shares that were fully paid. 7 persons including De Thierry signed the articles, an allotment of 3200 shares was made to De Thierry or his representatives, by the directors. However, no additional agreement was signed with him. It was held that the articles did not include any contract between De Thierry and the company in a written form as per the provisions of section 25 of Companies Act 1867 and hence the shares were not to be considered as fully paid.
  • Mellish LJ stated in Pritchard’s verdict that:

“I think that a company’s articles do not provide as a contract between the company and the vendor regarding selling the mine, in written form. The articles are merely an agreement between the company’s shareholders regarding their rights given for their shareholdings.”

  • In the case of Browne v La Trinidad, it happened that before the company was incorporated a contract was signed by B and a person who was a trustee of the company to be formed. The contract provided that B would hold the directorship of the company and would not be removed till after 1888. It was provided by the 6th clause of the agreement that the directors had to abide by the agreement and they may or may not change it, and if any change was made the clauses of the contract would be deemed as a part of company’s articles.
  • The agreement was implemented by both the parties, however, there was no contract signed by them to adopt the agreement. The judge held that even if the agreement was considered as incorporated in the articles, there did not exist any contract stating that the director could not be removed. The articles were a contract only between the members and not between B and the company.
  • Lindley LJ stated that: “From the case of Eley v Positive and other cases, it can be considered that the contract that the plaintiff was depending upon could not be used as a contract to maintain any operation. The decision would have been tough to make because some shares were allotted to the gentleman, and hence holds the membership of the company. In relation to the conditions of Section 33 there may be some credible reasoning that as the member of the company, the plaintiff and the company were bound by the contract whose reference is given in the articles. Obviously there is also a difficulty countering the previous reasoning that there could be no existence of any such contract between the company and the plaintiff as long as the shares were not given to him and it would be worth noticing that after allotting the shares to the plaintiff, there should arise a contract between the company and the member, which does not concern the shareholdings.”
  • In the cases that have been referred to in this verdict, the article that was under consideration gave rights to the members that did not lie within the scope of shareholders’ rights. And no case amongst these, involved a member seeking for the rights given to him as a member just like the rest of the corporates. Actually, the decisions lead to it. Any person outside the company, to whom the rights granted, claim to be granted by company’s articles in the capacity of the outsider, as an outsider, even when he is or becomes later the member of the company, is not allowed to sue the company, on the basis of those articles considering them as contracts between the company and him for the enforcement of his such rights.
  • Such rights are not included in the general rules and cannot be applied on all the members in the same manner and thus, have an existence only in the form of a contract involving the company and such a person as parties to the contract. Also, if shares are allotted to such a person for whom this kind of article is included, later, then he does not become enabled for suing the company on the basis of such an article for the enforcement of rights which are specifically given to him and not included in general rules of the corporate body.
  • It is difficult to interpret the words of section 33. Nothing can bound a company in the regular business except for the articles of association and the contracts signed by the company and the restrictions must be found from this section. However, in relation to the members, there is nothing in the section such as that who do the members covenant with. But there can be no such interpretation of the section stating that there will be no binding imposed on the company when the company is said to be bound. Nor can the interpretation of the section be that the members of the company are not to be restricted by the company in the light of articles which contain the rights and responsibilities of the members.
  • A lot of ease is created if the company is taken as the way the designers of the section may have considered it, to be involved as a party in the articles of association and memorandum. It is obvious from other rulings that a corporate body is authorised to make enforcement of any breach of its rules or to refrain any breach of its rules, against its members. Consider the cases, MacDougall v Gardiner, Pender v Lushington, Imperial Hydropathic, Blackpool etc.
  • Bowen LJ mentioned in the last case that ‘a company’s articles by the virtue of section 33 impose a binding on the company and all of its shareholders to an extent as if they had sealed the articles individually.’
  • It has been made clear by different rulings that shareholders are also authorised to make enforcement of any breach of company’s rules or to refrain any breach of its rules, against their company. And many cases include opinions of judiciary expressions that cannot be ignored. For example, Wood v Odessa as well as Salmon v Quin.
  • In such cases, there is reference to the enforcement of articles that specify the rights given to the members in general, and do not refer to any specific character’s rights that the above mentioned first four authorities referred to.
  • The reconciliation of these two different groups of opinions is difficult. However, I believe, that it is quite apparent that none of the company’s articles can form a contractual binding between that company and any third party. Also, no right that only claims to be given by the articles that include regulations for rights and restrictions of a company, to someone who may or may not be a member of the company, in a capacity outside the membership of the company can be brought in to force against the company. And, the articles that include regulations for rights and restrictions of members, normally, establishes rights and restrictions between the members and the company.
  • In the case under consideration, the plaintiff claims to have an enforcement of the rights as a member by the virtue of the articles and against the corporation. Article 49 is generally applicable on all the members and it may be right to stop the plaintiff to make an enforcement of his rights without providing any proof.
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