The Articles
Chapter Twenty
Syllabus topic 1, "FORMATION OF COMPANY"
Pages 103 to 107 of 998
In one line
The articles are the company's internal rulebook, and on registration they become a statutory contract binding the company and its members to each other, though only in their capacity as members and always subject to the Act and the memorandum.
In exam wording: under section 5(1) the articles contain the regulations for management of the company; under section 10(1), when registered, the memorandum and articles bind the company and its members to the same extent as if they had respectively been signed by the company and by each member, and contained covenants on their part to observe all their provisions; and under section 6 the Act overrides anything to the contrary in the memorandum, the articles, an agreement or a resolution.
Why the law has this at all
A company needs internal rules, how meetings are called, what a quorum is, how directors are appointed and removed, how shares are transferred, how dividends are declared. The Act supplies some of these as mandatory provisions, but most of the detail must be settled by the participants, because a family company of three and a listed company of three hundred thousand shareholders cannot sensibly run on identical rules.
That is why the articles exist and why the Act supplies model articles in Schedule I rather than a code. But rules mean nothing without a mechanism to enforce them, and the ordinary law of contract is unavailable: a member who buys shares ten years after incorporation has signed nothing and has no privity with the other members. Section 10(1) solves that by deeming the memorandum and articles to be signed by the company and by each member, so the rulebook binds everyone who becomes a member, whenever they join.
Section 5: what the articles contain
5(1) requires the articles to contain the regulations for management. 5(2) requires them to contain such matters as may be prescribed, with a proviso preserving the freedom to include additional matters considered necessary for management, so the prescribed content is a floor, not a ceiling.
5(3) to (5): entrenchment. The articles may contain provisions for entrenchment to the effect that specified provisions may be altered only if conditions or procedures more restrictive than those applicable to a special resolution are met. Entrenchment provisions may be made only on formation, or by amendment agreed to by all the members in a private company and by a special resolution in a public company; and where the articles contain entrenchment provisions, the company must give notice to the Registrar in the prescribed form and manner.
Entrenchment is the Act's answer to a real problem in joint ventures and family companies. A minority partner who negotiates a veto over, say, the issue of new shares, finds it worthless if the majority can simply alter the articles by special resolution. Entrenchment lets the parties raise the bar, including to unanimity, and makes that raised bar public through the Registrar. It is the one place where the Act allows the members to make their own constitution harder to change than the statute's default.
The Articles
5(6) to (9): form and model articles. The articles are to be in the respective forms specified in Tables F, G, H, I and J of Schedule I as applicable: Table F for a company limited by shares, G for a company limited by guarantee having share capital, H for one limited by guarantee without share capital, I for an unlimited company having share capital and J for an unlimited company without share capital. A company may adopt all or any of the regulations of the applicable model, and where it registers articles that do not exclude or modify the model's regulations, those regulations are the company's regulations in the same manner as if they were contained in registered articles. Section 5(9) preserves the position of companies registered under previous company laws.
Section 10: the statutory contract, and its two famous limits
Section 10(1) binds the company and its members as if each had signed and covenanted. Section 10(2) adds that all monies payable by a member to the company under the memorandum or articles are a debt due from him.
The contract created is peculiar, and the peculiarities are examined.
It binds the company to the members and the members to the company. A member may sue to enforce his membership rights, to have his vote counted, to receive a declared dividend, to have his share transfer dealt with as the articles provide, and the company may sue him for what the articles make payable.
It binds members to each other, at least in the sense that provisions regulating relations among members, pre-emption rights on transfer being the classic instance, are enforceable between them, though the orthodox view is that they are enforced through the company.
It does not bind in any capacity other than that of member. This is the great limitation, associated with the English decisions usually named as Eley and Hickman, neither of which carries a citation in this book because neither judgment was read in its sources. An article providing that a named person shall be the company's solicitor for life gives him no contractual right, because he is a stranger to the statutory contract in that capacity even if he happens also to be a member. Conversely, a provision regulating a member's rights as a member, an arbitration clause covering disputes between the company and its members, for example, binds him.
The Articles
And it does not bind outsiders at all. A third party dealing with the company cannot sue on the articles; his rights come from his own contract, though the articles may be incorporated into that contract by reference, which is how a director's or managing director's terms are often fixed.
Section 6: the hierarchy
Section 6 provides that the Act overrides the memorandum, the articles, any agreement executed by the company, and any resolution passed in general meeting or by the Board, whether registered or not, to the extent that they are repugnant to the Act; and that any provision in those documents which is repugnant to the Act becomes void to that extent.
The hierarchy for an examination answer is therefore: the Act, then the memorandum, then the articles. An article inconsistent with the memorandum is void to that extent; an article or memorandum provision inconsistent with the Act is void to that extent; and neither can confer a power the Act denies.
A worked example
Anagha and Bhavesh each hold half of Konkan Marine Private Limited. Anagha's investment was made on the promise that no new shares would be issued and no new director appointed without her consent. Three provisions are proposed for the articles: that no allotment or appointment shall be made without the written consent of Anagha so long as she holds shares; that Anagha's brother, a solicitor, shall be the company's legal adviser for ten years; and that any dispute between the company and a member shall be referred to arbitration.
The veto. As an ordinary article it is worth little: the majority in a general meeting could alter the articles by special resolution and delete it, and with an equal shareholding the position is precarious in any event. The correct device is entrenchment under s.5(3): the articles provide that this provision may be altered only with the written consent of every member, or by unanimous resolution, a condition more restrictive than a special resolution. Because the company is being formed, the entrenchment can be inserted on formation, and notice must be given to the Registrar under s.5(5). Anagha's protection then survives a change of heart by the majority.
The solicitor. This article is unenforceable by the brother. The statutory contract in s.10(1) binds the company and its members as members, and he claims in the capacity of solicitor; even if he were a member, that capacity would not help him. If he wants an enforceable right he needs his own retainer agreement with the company, which may incorporate the article by reference.
The arbitration clause. This one binds. It regulates disputes between the company and a member in that capacity, so it falls squarely within the statutory contract and can be enforced by either side.
The Articles
Now add a fourth provision: that the company may pay a dividend out of capital in a bad year. It is void under s.6, being repugnant to the Act's own dividend provisions in s.123, and no amount of member consent can save it. That is the hierarchy operating.
Distinctions
| Memorandum | Articles | |
|---|---|---|
| Purpose | Identity, capacity, liability, capital: outward-facing | Regulations for management: inward-facing |
| Forms | Tables A to E of Schedule I | Tables F to J of Schedule I |
| Alteration | s.13, special resolution, with approvals for name and change of State, and conditions under s.13(8) | s.14, special resolution; Tribunal approval to convert a public company into a private one |
| Entrenchment | Not available | Available, s.5(3) to (5), on formation or by the prescribed consent, with notice to the Registrar |
| Effect of inconsistency | Prevails over the articles | Void to the extent repugnant to the memorandum or the Act, s.6 |
What it does NOT mean
Not a contract with outsiders. Section 10(1) binds the company and its members; a third party enforces only his own contract.
Not a contract in a non-member capacity. A member who is also a solicitor, director or employee cannot use the articles to enforce rights in that other capacity.
Not immune from the Act. Section 6 makes any repugnant provision void, and the articles cannot confer what the Act withholds.
Quick revision
s.5(1) and (2): regulations for management, prescribed matters as a floor. s.5(3) to (5): entrenchment, conditions more restrictive than a special resolution; only on formation, or by unanimous agreement in a private company or special resolution in a public one; notice to the Registrar. s.5(6) to (9): Tables F to J of Schedule I; model regulations apply so far as not excluded or modified. s.10(1): memorandum and articles bind the company and each member as if signed and covenanted; s.10(2): money payable under them is a debt. Limits: binds in the capacity of member only; no rights to outsiders. s.6: the Act overrides memorandum, articles, agreements and resolutions, and repugnant provisions are void.
Test yourself
1. What is entrenchment, and when may it be introduced? A provision in the articles that specified provisions may be altered only on conditions or procedures more restrictive than a special resolution; it may be made on formation, or by amendment agreed to by all the members of a private company or by special resolution in a public company, with notice to the Registrar.
2. An article names a person as the company's architect for life. Can he enforce it? No. The statutory contract under s.10(1) binds the company and its members in the capacity of members, and he claims as an architect; he needs his own contract with the company.
The Articles
3. Which prevails, an article or the memorandum, and why? The memorandum, because the articles are subordinate to it, and by s.6 any provision repugnant to the Act or the memorandum is void to that extent.
4. A company registers articles that say nothing about proxies, and it is limited by shares. What governs proxies? The corresponding regulation of Table F of Schedule I, since the model regulations apply so far as the registered articles do not exclude or modify them.
5. Is money payable by a member under the articles recoverable, and on what footing? Yes, as a debt due from him to the company under s.10(2).
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.