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:
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:
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.