The Contractual effect of a company’s articles of association

“The extent of the contractual effect of a company’s articles has long been a subject of controversy generating much academic debate, interest and at times consternation.”Griffin, S Companies Act 2006 – altering the contractual effect of the articles of associationCompany Law Newsletter (2010), pages 1-4. (Available on WestLaw).Provide an overview of the academic debate in relation to the contractual effect of a company’s articles, highlighting specifically where the differences of opinion can be found.

Introduction

The Contractual effect of a company’s articles of association has long been a contentious concept which is commonly referred to as the “statutory contract”, distinguishable from normal commercial contracts and uniquely applicable to each and every member of a company as a separate and binding covenant[1]. S.33 of the Companies Act 2006 now forms the basis of this “multi-party” contract and is the successor to s.14 of the Companies Act 1985. S.33 states that: “the provisions of the company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe it”.

This formulation represents only a slight departure from s.14 which made no specific mention of whether the company was a party to the contract. This small lexical difference aside the words of the new provision largely replicate the language of the old and, in Sealy and Worthington’s opinion, mean that “the same uncertainties seem destined to plague this area”. Since s.33 has come into force only two cases have mentioned it directly and so the likely effects it will have are still largely theoretical and based on the controversy which dogged s.14. This essay will provide an overview of the company’s articles of association and in part 1 will examine the academic debate which has surrounded both s.14 and now s.33.

Part 1: The constitutional debate

The academic debate on s.14 centers on the extent to “which it regulated a company’s obligation to adhere to the terms of its articles in relation to dealing with its members”. The extent of a company’s contractual obligation was, as noted above, notably absent from the 1985 version and this was the catalyst for a vigorous debate into the precise boundaries of the company in relation to the articles. Astbury J argued that s.14 creates rights and obligations between the company and its members but qualified it heavily by saying that this only applied in relation to those articles which regulated the rights and obligations of members generally. Griffin characterizes this, in light of the case law, as being that a member can enforce only those parts of the articles which relate to a “pure membership obligation” . Purely procedural issues, such as a member’s right to vote at a company meeting would be denied where the meeting related to an internal procedure but accepted where the meeting related to a more substantial issue of constitutional significance. As Griffin points out there was strong opposition to Astbury J’s restricted view of the extent of a company’s contractual obligation under s.14 with Lord Wedderburn arguing that the obligation extended to all obligations save those which related to merely “internal procedures” and as long as it was pursued by a member qua member and Gregory argued that, without exception, a member should be able to enforce every obligation within a company’s articles irrespective of status.

The new drafting of s.33, which is more expansive than s.14 in relation to the companies’ contractual obligations, would seem to support Lord Wedderburn and Gregory’s arguments. As Griffin notes the wording was inserted late into the Company Law bill by Lord Wedderburn himself in the House of Lords and on a literal reading does reflect his teachings. Section 33 has now been in operation since 2009 and it is still unclear as to whether it will evolve towards Lord Wedderburn’s views or remain entrenched with Astbury J. So far the courts have steered clear of deciding if it does and Randall QC has only seen fit to mention the “slightly changed” language of s.33.

Conclusion

In conclusion the contractual effect of the articles of association, notwithstanding the altered language employed in s.33, will remain contentious for many years to come. The debates which plagued s.14 of the 1985 Act have not yet been exorcised by the Companies Act 2006 and the key question remains as to the precise extent of a company’s contractual obligations under the articles. The lack of cases in the few years that s.33 has been operational would seem to hint that the courts are unwilling to give effect to Lord Wedderburn’s scholarly intentions much less Gregory’s. Sealy and Worthington are right when they warn that the problems behind s.14 will be inherited by s.33:

“…this provision [s.14] has been an endless source of varying interpretations and conflicting analyses…the same uncertainties seem destined to plague this area”.

Bibliography

Books

1. Gower & Davies (2008) Principles of Modern Company Law Sweet & Maxwell: London
2. Sealy & Worthington (2008) Cases and Materials on Company Law Oxford Uni Press: Oxford

Journals

1. Gregory, R (1981) ‘The Section 20 Contract’ Modern Law Review 44 p.526
2. Griffin, S (2010) ‘Companies Act 2006 – altering the contractual effect of the articles of association?’ Company Law Newsletter
3. Lord Wedderburn (1957) ‘Shareholders’ Rights and the Rule in Foss v Harbottle’ Company Law Journal p.194
4. Scanlan, Gary & Ryan, Chris (2007) ‘The Accrual of Claims for Breach of Contract Under s.14 Companies Act 1985 and s.33 Companies Act 2006: The Continuing Obligation’ Company Lawyer 28(12) pp367-371

Cases

1. Cream Holdings Limited v Stuart Davenport [2010] EWHC 3096 (Ch)
2. Fulham Football Club (1987) Ltd v Richards and another [2010] EWHC 3111 (Ch)
3. Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch.881

Statute

1. Companies Act 2006
2. Companies Act 1985
3. Scanlan, Gary & Ryan, Chris (2007) ‘The Accrual of Claims for Breach of Contract Under s.14 Companies Act 1985 and s.33 Companies Act 2006: The Continuing Obligation’ Company Lawyer 28(12) pp367-371
4. Gower & Davies (2008) Principles of Modern Company Law Sweet & Maxwell: London
5. Companies Act 2006, s.33
6. Sealy & Worthington (2008) Cases and Materials on Company Law Oxford Uni Press: Oxford at p.250
7. Fulham Football Club (1987) Ltd v Richards and another [2010] EWHC 3111 (Ch)
8. Cream Holdings Limited v Stuart Davenport [2010] EWHC 3096 (Ch)
9. Griffin, S (2010) ‘Companies Act 2006 – altering the contractual effect of the articles of association?’ Company Law Newsletter at p.1
10. Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch.881 at 900 per Astbury J
11. Griffin, S (2010) ‘Companies Act 2006 – altering the contractual effect of the articles of association?’ Company Law Newsletter at p.1
12. Macdougall v Gardiner (1875-6) L.R.1 Ch.D.13 (CA)
13. Lord Wedderburn (1957) ‘Shareholders’ Rights and the Rule in Foss v Harbottle’ Company Law Journal p.194
14. Gregory, R (1981) ‘The Section 20 Contract’ Modern Law Review 44 p.526
15. Griffin, S (2010) ‘Companies Act 2006 – altering the contractual effect of the articles of association?’ Company Law Newsletter at p.2
16. Ibid at p.4
17. Fulham Football Club (1987) Ltd v Richards and another [2010] EWHC 3111 (Ch) at para 59 per Vos J
18. Cream Holdings Limited v Stuart Davenport [2010] EWHC 3096 (Ch) at para 27 per Randall QC
19. Sealy & Worthington (2008) Cases and Materials on Company Law Oxford Uni Press: Oxford at p.250