Company Law Supervision II – Cases
THE CORPORATE CONSTITUTION
Legal Status
Company Against Member
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915]
Articles provided that any dispute between member and company should be solved by arbitration. C
was a member of company, and company refused to register C’s sheep. C complained and sued
company for declaration that his sheep were entitled to be registered; company applied for action to be
stayed on basis that dispute should go to arbitration. C argued that arbitration clause did not apply, as
the dispute was unrelated to C’s membership of the company – rather it was related to . Held:
Enforceability of Articles
1) Where an outsider purports to be given rights by articles in their capacity as an outsider, are
not enforceable.
This case even if outsider is or subsequently becomes a member.
Hence fact that an outsider purportedly given rights in a company’s articles is
subsequently granted shares in company does not make a previous claim
enforceable.
2) In addition member of a company can only enforce his rights under constitution in his
capacity as a member.
And not e.g. as director, solicitor etc.
3) Where articles purport to grant rights to an outsider, if outsider subsequently becomes
member this does not mean that he can enforce those earlier rights
i.e. as these rights are still not in his capacity as a member
regardless of fact that outsider has since become a member
Facts
● C’s claim is to enforce his rights as a member of D.
● Arbitration article deliberately addresses disputes amongst members themselves.
● Therefore case stayed in favour of arbitration.
,Members Against Company
Quin & Axtens Ltd v Salmon [1909]
Company had two managing directors. Director A (Salmon) was given a veto by articles over any
decision of company to deal with property. Director B acted contrary to requirement, and got ordinary
resolutions from shareholders authorising company to act in this way. Salmon sued company to stop it
acting contrary to his veto. Held:
Ordinary Resolution
● Is not permitted to act upon ordinary resolutions which are inconsistent with substantive
requirements in articles.
i.e. in matters of substance, constitution can only be deviated from by special
resolution.
● Thus existence of ordinary resolution is irrelevant to whether company is breaching its
articles.
Qua Member
● Director A was also a member of the company.
● Therefore had power in his capacity as member to force company to adhere to its
constitution.
i.e. by not dealing with property where he had used his veto.
● Thus injunction granted against company acting upon the resolutions passed.
Members Amongst Themselves
Rayfield v Hands [1960]
Articles provided that where a member wished to dispose of shares, in certain circumstances directors
had an obligation to purchase those shares offered. C wished to sell his shares and a director, who was
also a member, refused to take them. Held:
● Company’s articles intended for the directors to be bound as members in this situation.
i.e. as matter related to purchase of shares.
● Therefore directors were bound by articles in their capacity as members.
Eley v Positive Life [1876]
Articles stated that C was to be the solicitor of Positive Life. However he was not appointed so sued
for breach of the articles. At time articles were created, C was not a member. However by time C
brought action, C was a member. Held:
● C could not enforce the articles.
● This because outsiders to company cannot enforce rights purportedly granted to them
under articles.
● Articles only have legal effect as between members.
● NB court did not look at all at whether fact that C had subsequently become a member meant
he had right to enforce articles…
London Sack & Bag [1943]
,C and D were both members of a trade association company. Articles of association stated that ‘trade
disputes’ should be submitted to arbitration. Dispute between two members arose as to a transaction
between them; one of pair refused to submit to arbitration and sued. D sought to have court case
stayed. Held:
● No rights of action can arise under articles in relation to matters which arise outside the
‘company relationship’
● Matter under dispute was a commercial trading transaction
Thus transaction had nothing to do with C and D’s membership of company.
● Thus article could not be enforced against C.
Implied Contracts
Re New British Iron [1898]
Company’s articles provided for remuneration of directors at a certain rate. Issue was whether
directors could enforce this. Held:
● C could not enforce articles in his capacity as director.
● However a separate contract could be implied upon same terms in article.
● This separate contract could be enforced.
● NB Directors’ service contracts must now be evidenced in writing – s.227-229.
thus this result would no longer be possible
Implication of Terms
Towcester Racecourse v Racecourse Association [2003]
C argued that it was implied term of articles of association that any inquiry into a member would be
proper, efficacious and open to its members; and that therefore directors could be directly liable to
shareholders for breach of this duty. Held:
● Directors do not have direct contractual relationship with members of company.
● Directors act on behalf of company
And not on behalf of shareholders
Thus the only duties they owe are to company
● Therefore directors cannot owe implied contractual duties to shareholders.
Bratton Seymour Service v Oxborough [1992]
C claimed that courts should imply a term into articles of association to effect that a company should
contribute to upkeep of an amenity area in a housing development, so as to give articles business
efficacy. Held:
● Courts will not imply terms into articles from extrinsic evidence of surrounding
circumstances.
This because such evidence is only known to a few people.
Thus would be prejudicial to third parties.
AG Belize v Belize Telecom [2009]
, Articles provided that certain special shares gave their holders a right to appoint two directors of the
company. C purchased some of these voting shares, but fell into financial trouble and later sold them.
Issue was whether directors appointed by C were required to vacate office one C sold his shares. Held:
● Courts will imply terms into articles where this merely makes express what they would
have reasonably been taken to mean against relevant background.
● Court only has power to ascertain the meaning of the articles as a whole.
And NOT individual terms.
● Thus courts can imply terms in fact based upon meaning of articles as a whole.
● Therefore “relevant background” includes:
i) Scheme of Articles themselves
ii) To a very limited extent, background facts that third parties involved with the
company would reasonably have known
● On facts, anyone reading document as a whole would have reasonably understood that
directors were required to vacate office.
Therefore terms could be implied to this effect.
Alteration of Articles
Common Law Protections
Allen v Gold Reefs of West Africa [1900]
● Shareholders’ powers to alter the articles via special resolution must be exercised “bona fide
for the benefit of the company as a whole”.
Expropriation
Brown v British Abrasive Wheel Co [1919]
Company needed urgent capital. Shareholders, holding 98% of shares, were willing to put money up
on condition that they could buy out remaining 2% of shareholders. Majority proposed special
resolution adding provision to articles to effect that any shareholder was bound to transfer his shares
upon request from the holders of over 90% of shares. C, part of 2%, challenged it. Held:
● Majority had acted in good faith when proposing the resolution.
● However provision was not for benefit of company as a whole.
But simply for benefit of majority.
● Therefore alteration of articles was invalid.
● Very objective test. Notwithstanding majority’s good faith, were held not to be acting in
interests of company.
Dafen Tinplate Co v Llanelly Steel Co [1920]
Resolution inserted new article empowering majority to buy out “any shareholder as they thought
proper”. Held:
● Article was invalid.
● This because it was self-evidently wider than could be necessary in interests of company.
Sidebottom v Kershaw [1920]
THE CORPORATE CONSTITUTION
Legal Status
Company Against Member
Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915]
Articles provided that any dispute between member and company should be solved by arbitration. C
was a member of company, and company refused to register C’s sheep. C complained and sued
company for declaration that his sheep were entitled to be registered; company applied for action to be
stayed on basis that dispute should go to arbitration. C argued that arbitration clause did not apply, as
the dispute was unrelated to C’s membership of the company – rather it was related to . Held:
Enforceability of Articles
1) Where an outsider purports to be given rights by articles in their capacity as an outsider, are
not enforceable.
This case even if outsider is or subsequently becomes a member.
Hence fact that an outsider purportedly given rights in a company’s articles is
subsequently granted shares in company does not make a previous claim
enforceable.
2) In addition member of a company can only enforce his rights under constitution in his
capacity as a member.
And not e.g. as director, solicitor etc.
3) Where articles purport to grant rights to an outsider, if outsider subsequently becomes
member this does not mean that he can enforce those earlier rights
i.e. as these rights are still not in his capacity as a member
regardless of fact that outsider has since become a member
Facts
● C’s claim is to enforce his rights as a member of D.
● Arbitration article deliberately addresses disputes amongst members themselves.
● Therefore case stayed in favour of arbitration.
,Members Against Company
Quin & Axtens Ltd v Salmon [1909]
Company had two managing directors. Director A (Salmon) was given a veto by articles over any
decision of company to deal with property. Director B acted contrary to requirement, and got ordinary
resolutions from shareholders authorising company to act in this way. Salmon sued company to stop it
acting contrary to his veto. Held:
Ordinary Resolution
● Is not permitted to act upon ordinary resolutions which are inconsistent with substantive
requirements in articles.
i.e. in matters of substance, constitution can only be deviated from by special
resolution.
● Thus existence of ordinary resolution is irrelevant to whether company is breaching its
articles.
Qua Member
● Director A was also a member of the company.
● Therefore had power in his capacity as member to force company to adhere to its
constitution.
i.e. by not dealing with property where he had used his veto.
● Thus injunction granted against company acting upon the resolutions passed.
Members Amongst Themselves
Rayfield v Hands [1960]
Articles provided that where a member wished to dispose of shares, in certain circumstances directors
had an obligation to purchase those shares offered. C wished to sell his shares and a director, who was
also a member, refused to take them. Held:
● Company’s articles intended for the directors to be bound as members in this situation.
i.e. as matter related to purchase of shares.
● Therefore directors were bound by articles in their capacity as members.
Eley v Positive Life [1876]
Articles stated that C was to be the solicitor of Positive Life. However he was not appointed so sued
for breach of the articles. At time articles were created, C was not a member. However by time C
brought action, C was a member. Held:
● C could not enforce the articles.
● This because outsiders to company cannot enforce rights purportedly granted to them
under articles.
● Articles only have legal effect as between members.
● NB court did not look at all at whether fact that C had subsequently become a member meant
he had right to enforce articles…
London Sack & Bag [1943]
,C and D were both members of a trade association company. Articles of association stated that ‘trade
disputes’ should be submitted to arbitration. Dispute between two members arose as to a transaction
between them; one of pair refused to submit to arbitration and sued. D sought to have court case
stayed. Held:
● No rights of action can arise under articles in relation to matters which arise outside the
‘company relationship’
● Matter under dispute was a commercial trading transaction
Thus transaction had nothing to do with C and D’s membership of company.
● Thus article could not be enforced against C.
Implied Contracts
Re New British Iron [1898]
Company’s articles provided for remuneration of directors at a certain rate. Issue was whether
directors could enforce this. Held:
● C could not enforce articles in his capacity as director.
● However a separate contract could be implied upon same terms in article.
● This separate contract could be enforced.
● NB Directors’ service contracts must now be evidenced in writing – s.227-229.
thus this result would no longer be possible
Implication of Terms
Towcester Racecourse v Racecourse Association [2003]
C argued that it was implied term of articles of association that any inquiry into a member would be
proper, efficacious and open to its members; and that therefore directors could be directly liable to
shareholders for breach of this duty. Held:
● Directors do not have direct contractual relationship with members of company.
● Directors act on behalf of company
And not on behalf of shareholders
Thus the only duties they owe are to company
● Therefore directors cannot owe implied contractual duties to shareholders.
Bratton Seymour Service v Oxborough [1992]
C claimed that courts should imply a term into articles of association to effect that a company should
contribute to upkeep of an amenity area in a housing development, so as to give articles business
efficacy. Held:
● Courts will not imply terms into articles from extrinsic evidence of surrounding
circumstances.
This because such evidence is only known to a few people.
Thus would be prejudicial to third parties.
AG Belize v Belize Telecom [2009]
, Articles provided that certain special shares gave their holders a right to appoint two directors of the
company. C purchased some of these voting shares, but fell into financial trouble and later sold them.
Issue was whether directors appointed by C were required to vacate office one C sold his shares. Held:
● Courts will imply terms into articles where this merely makes express what they would
have reasonably been taken to mean against relevant background.
● Court only has power to ascertain the meaning of the articles as a whole.
And NOT individual terms.
● Thus courts can imply terms in fact based upon meaning of articles as a whole.
● Therefore “relevant background” includes:
i) Scheme of Articles themselves
ii) To a very limited extent, background facts that third parties involved with the
company would reasonably have known
● On facts, anyone reading document as a whole would have reasonably understood that
directors were required to vacate office.
Therefore terms could be implied to this effect.
Alteration of Articles
Common Law Protections
Allen v Gold Reefs of West Africa [1900]
● Shareholders’ powers to alter the articles via special resolution must be exercised “bona fide
for the benefit of the company as a whole”.
Expropriation
Brown v British Abrasive Wheel Co [1919]
Company needed urgent capital. Shareholders, holding 98% of shares, were willing to put money up
on condition that they could buy out remaining 2% of shareholders. Majority proposed special
resolution adding provision to articles to effect that any shareholder was bound to transfer his shares
upon request from the holders of over 90% of shares. C, part of 2%, challenged it. Held:
● Majority had acted in good faith when proposing the resolution.
● However provision was not for benefit of company as a whole.
But simply for benefit of majority.
● Therefore alteration of articles was invalid.
● Very objective test. Notwithstanding majority’s good faith, were held not to be acting in
interests of company.
Dafen Tinplate Co v Llanelly Steel Co [1920]
Resolution inserted new article empowering majority to buy out “any shareholder as they thought
proper”. Held:
● Article was invalid.
● This because it was self-evidently wider than could be necessary in interests of company.
Sidebottom v Kershaw [1920]
