Personal Rights of Members in a Company having UK Incorporation

14 Jan

When a person is preparing for setting up a limited company UK, at that time, the memorandum and the articles of association have to be formulated and the documents have to be submitted to companies registration office UK. The subscribers to the memorandum are registered as members in the companies registration office UK. Now, after knowing the basics of how to register a company in UK, the next step is to understand the rights and authorities that are given to the members of a company. These are the securities of the members, and make sure that the members are not taken for granted in the company. Generally, the memorandum and the articles of a company give rights to the members. But members also have personal rights and are allowed to make claims against the breach of any of their personal right. The article focuses on such personal rights of members.

Members’ Rights as Individuals

Members are considered one of the important organs of the company. The second important organ is directors of a company. Members are given certain rights generally, by the articles of association, which they have to impose for making use of their constitutional authorities. Their roles and authorities are specified in company’s articles. In the similar way, members are allowed to try for getting remedies for personal losses caused by the wrongful acts that were done against them via breaching any provisions of the company’s articles. Such claims do not concern with the rights given to the members by the constitution, generally. However, can the same approach be taken in both the cases? This matter has been put on the table for discussion in this blog.

Contractual Binding of Articles of Association 

The constitution of a company, also known as the articles of association, are usually, deemed as contract of a special nature. As mentioned in Section 33 of Companies Act 2006, the company’s articles form a contractual binding upon the company and the members of that company. Hence, when it comes to interpreting these articles, they should be interpreted just the way a contract’s provisions are interpreted. As in the case of Cream Holdings and Equitable Life Assurance. It can be derived that as holders of shares in their company, the members may enjoy separate rights given to them personally, under contractual articles. Also they have the right to sue their company or any of the rest of the members, for imposition of the rights given to them.

There may be two possible hurdles when any claim is to be made by the member for any personal damage which is result of any violation of articles. Such impediments are the following:

  • The courts have brought into force, a very limited scope of interpretation of the rights given to the members by the constitution of the company. Hence, as a consequence, the member is only allowed to sue the company or other persons of the company, as members. Also, the court does not allow to provide remedies for simple irregularities of the company.
  • Also in cases, where the reasons for the claim by the members are the same as for the claim of the company, for any wrong done by anyone in the company, then the court may not give permission to the claim made by the members on the basis that such a claim is a form of the reflective losses of the members that will be given a remedy by giving a remedy to the company on the whole, so that the company compensates its losses. This ruling has been imposed substantially rather than by mere method which rejects double recovery.

Contractual Effectivity of Articles of Association 

This contractual nature of company’s articles has been mentioned in the 2006 as well as 1985 versions of Companies Act.

In Section 33 of Companies Act 2006, it is stated that:

A company’s articles via its clauses imposes a binding on the company as well as its members up to a limit as if the agreements had been signed on behalf of company and on behalf of every member of the company to observe those clauses…

According to Companies Act 1985, both, the memorandum and the articles, are termed as forms of contracts between the company and its members. The first provision of Section of Companies Act 1985 states that:

Contingent to this clause, a company’s memorandum along with its articles of association after the registration, impose a binding on the company and on the members of that company, to a limit as if every member of the company had been a signatory to and sealed the documents respectively, and there was an agreement included on behalf of every member to follow all the rulings given by the memorandum as well as the articles of the company.

It should be noted that there is no contractual binding imposed by the articles, between the company and anyone who does not hold the membership in the company.

Ambiguity of Contractual Nature of Articles

In spite of the clear wordings that have been used in the above mentioned provision, to depict the contractual nature of company’s articles, it has been a topic of disputable arguments, that what is the actual interpretation of this provision. Hence, it has led to various kinds of interpretations and contradictory inspection. One of the problems with the 1985 version of Companies Act was that, it did not make it clear that whether the company was involved as one of the parties of this contract or not. However, the 2006 version of Companies Act clearly specifies that the company is a party to the agreement as well. However, excluding that, the rest of the words of the 2006 provisions are majorly same as the words of 1985 provision. Hence, the same ambiguities accompany the 2006 provision.

A case study is presented to explain certain aspects regarding the personal rights of members and Section 33 of Companies Act 2006.

Right of Members for Enforcement of Constitutional Conditions

At the time of UK incorporation of company, it gives its members certain rights and authorities specified as conditions in the constitution of that company. If any carelessness is shown in the implementation of such rights, then the members are allowed certain compensations. Such as, every member of a corporate body is allowed under the contractual nature of the constitution specified by Section 33 of Companies Act 2006, to bring in to force the observance of the conditions of the articles of a company. Elaboration of the scenario is given with the help of following case study:

Case Study: Wood v Odessa Waterworks Corporation

The articles of association of the company gave authority to the directors with the approval of the company’s members in a general meeting, to make declaration of a dividend as paid to the members holding shares in the company. An ordinary resolution was passed by the company, that gave a proposal to make no payment of the dividends, instead to dispense to the shareholders, debenture-bonds. Hence, as a consequence, forcing the members to lend their company back, a sum which was to be to paid to the company in the form of dividends, for anything for 30 years. The claimant was Wood, a shareholder in the company, who wanted to get an order from the court for preventing the company from adoption of the resolution. The court held that the resolution was not in consistency with the articles of the company and hence, the permission was given to the claim.

It was held by Stirling J that:

  • There was no such disagreement on the point that neither the profits that were to be used for paying dividends were actually earned by the company nor the disagreement was that an authority lied with the company to impose any charge on the belongings of the company or was authorised to gain finance from such charges as well to make use of the money gained by such charges, in paying for the dividends.
  • The point of disagreement and question is that, does the majority has the right to stress against the wish of the minority shareholders, that the actual earned profits should be paid as dividends, but not as cash, but in the form of issuance of company’s debenture-bonds, at an interest of 5 euros per cent and can be repaid at par via yearly drawing for up to 30 years.
  • It is derived from the conditions specified in the bonds presented for subscription purposes that the company is not allowed to issue the bonds in a market openly, unless it does it at a discount of minimum 10 euros per cent. The rights bestowed upon members of the company in relation to dividing the company’s profits are under the administration of clauses of articles of the company. It is specified by Section 16 of Companies Act 1862 that a company’s articles are a binding upon the company and its members to a limit as if every member of the company had given his name for subscription and sealed it and the articles included an agreement on his behalf as well as his heirs, managers or executors that the provisions of the articles would be observed contingent to the rulings of this Act.
  • In Section 50 of Companies Act 1862, it has been made mandatory for the company to pass a special resolution to bring any modification in the current articles. However, in the present case, no special resolution was passed or tried to be passed to bring any alteration in the articles of the company, and the question is that if this is a case where the holders of majority shares can restrict the holders of minority shares who do not agree with them.
  • The articles of a company, not only bind the company and the members, but also provide a contract between every shareholder with every other shareholder. In my views, the question that has been stated by me, has an answer in negative if there exists any agreement between the holders of shares in the company regarding the partition of profits and the conditions of that agreement are not followed. 
  • Hence, it then makes me think that does the resolution proposed conform by the conditions in the articles of this company. The articles specify that the directors are allowed to make a declaration for the payment of dividend to the shareholders, however, with the approval of the members in a general meeting. Apparently, it seems that it should be paid in cash. Whereas the payment via debenture bonds is not in the form of cash. They are only pacts or make promises for paying. If the company becomes prevalent in contention, over the shareholders, they may be obliged to take in place of cash, a loan, that has to be paid after some undetermined period. I believe it should not happen.

Personal Action of Members

Another aspect of personal rights given to a member of the company at the time of setting up a limited company UK is that, in situations where any right of any individual member have been violated or harmed, then it is possible for the members to take an action personally to bring into force the right even when the company has itself been impacted by the same wrong done by someone in the company. As in the case of Pender v Lushington. However, generally, such a claim is not given acceptance due to the concept of reflective loss.

* The email will not be published on the website.