The Articles and their Enforcement

The constitution is a statutory contract

S33(1) CA 2006: “… the provisions of a company’s constitution bind the company and
its members to the same extent as if they were covenants on the part of the company
and of each member to observe those provisions”

The rule in FOSS V HARBOTTLE (1843) 2 Hare 461:

The term "rule in Foss v Harbottle" is used to describe policy of courts of not hearing
a claim concerning the affairs of a company brought by member(s) of the company
The reason for imposing limits to the enforcement of articles is:
(1) The proper plaintiff in respect of a wrong allegedly done to a company is prima
facie the company
(2) Where the alleged wrong is a transaction which might be made binding on the
company by a simple majority of the members, no individual member of the
company is allowed to bring a claim in respect of it
a. (Of course, subject to ability of minority to bring a derivative claim, an unfairly
prejudicial petition, or seek winding up on just & equitable ground)
This is based on fundamental principles of company law:
(a) The proper claimant principle
a. "A cannot bring an action against B to recover damages on behalf of C for an
injury done by B to C. C is the proper plaintiff because C is the party injured
and, therefore, the person in whom the cause of action is vested" (Prudential
Assurance (No 2) [1982]
(b) Refusal to decide business policy
a. "This court is not to be required on every occasion to take the management of
every playhouse and every brewhouse in the kingdom" (Carlen (1812))
(c) The majority rule
a. " The submission of the minority is the principle on which civil society is
founded. It is a principle essential for that reasonable harmony which is
necessary for the coherence of all societies, great or small, civil or religious"
(Cooper v Gordon (1869)
In addition to these principles, the rule also has practical advantages: it prevents
multiplicity of shareholder suits and eliminates wasteful actions of shareholders
trying to harass the company. In summary:

- If breach of the constitution is seen as a breach against the company, it is therefore

for the company to take action or for the majority to ratify it.

However, if breach is an infringement of the member’s personal rights, they are not caught
by the Foss rule, and can make a claim to vindicate a personal right
Articles
The courts have upheld (a) the rule in Foss and (b) the notion that the articles create a
contract, by drawing a distinction between:
(1) Provisions in the articles which do create enforceable personal rights
conferred on a member qua member (not subject to Foss)
(2) Provisions which relate to matters of internal management; breaches of these
provisions amount only to internal irregularities, and are not actionable by individual
shareholders
(Note therefore that, in the second case, legal action to enforce the company's articles is
taken in the shadow of the internal management principle – that the company is a proper
claimant in a matter concerning internal management)
There are therefore 3 possible situations in which a claim can be enforced:
(1) Members against Company
(2) Company against Members
(3) Members against Members (unusually)
Members and Company
Principle: Articles are an enforceable contract only in relation to membership matters
 Beattie v E and F Beattie Ltd [1938]:
o Facts:
 Co brought legal proceedings against director (who was also a
member) concerning his conduct as a director
 Director claimed that proceedings were covered by a provision in Co's
articles that any dispute between Co and member was to be referred
to arbitration
o Held:
 Arbitration article did not apply to a member’s activities as a director
o Relevant dicta
 "… the contractual force given to the articles of association by
the section is limited to such provisions of the articles as apply
to the relationship of the members in their capacity as members."
Hickman v Kent [1915]:

- "… some such view should, I think, be adopted and general articles dealing
with the rights of members “as such” treated as a statutory agreement
between them and the company as well as between themselves inter se …"
This dictum ^^ is reflected in s33 CA 2006:

- "The wording in CA 2006, s 33 is a clarification of the wording in CA 1985, s 14 …

But, as was emphasised in the Parliamentary debates, the only purpose of the
amended wording is to state explicitly that the company is a party to the
constitution as well as the members, as was established by Hickman v Kent"
(Hannigan)
Outsider Rights
Non-membership provisions create "separate contracts" and give "outsider rights"
Principle: Outsider rights are not enforceable against the company
 Hickman v Kent or Romney Marsh Sheepbreeder’s Association [1915]
o Facts:
 Articles provided that disputes between the company and a
member (shareholder) should be referred to arbitration. A member
in dispute with the company commenced legal proceedings
o Held:
 A company is entitled as against its own members to enforce and
restrain breaches of the articles. On the facts, the member was
bound, and the dispute was referred to arbitration
o Relevant dicta
 “An outsider to whom rights purport to be given by the articles in his
capacity as such outsider, whether he is or subsequently becomes a
member, cannot sue on those articles treating them as contracts
between himself and the company to enforce those rights.”
Therefore, in Eley v Positive Life Assurance Co, a person (E) named in the articles as a
solicitor was unable to enforce that provision when the company employed someone else;
the articles conferred no rights between him and the company
Exception to Principle: It is possible for a member of a company to obtain an
injunction to prevent it acting in a way that is inconsistent with a non-membership
provision of the articles.
 Quin & Axtens v Salmon [1909]:
o Facts & Held:
 Salmon sued, as a member, to enforce a provision which
conferred rights on him as a director
 House of Lords granted an injunction against the company and its
directors preventing them from acting contrary to the provisions of the
constitution
There is ongoing academic debate as to how this was/is justified. Wedderburn,
interpreting the case, argued it as follows:

- “The proposition is that a member can compel the company not to depart from the
contract with him under the articles, even if that means indirectly the enforcement of
‘outsider’ rights vested either in third parties or himself, so long as, but only so long
as, he sues qua member and not qua ‘outsider’."
Consider the arguments, in this context, made by Wedderburn 1, and further his
reliance on the judgment in Beattie v E&F Beattie Ltd [1938] (Compare usefully)
See also Gregory, Prentice in Mayson & French

1
The unending debate on the contractual effect of the company's constitution - a comparative perspective |
Westlaw UK
Members to Members
Principle: Courts are generally reluctant to provide members of companies with contractual
remedies in disputes between members (except for in Rayfield, but unusual/fact-specific)
Rayfield v Hands [1960]

- Facts:
o Art 11 of a company’s articles of association provided: “every member
who intends to transfer shares shall inform the directors who will take the
said shares equally between them at fair value …”
o The plaintiff, a shareholder, informed defendants, as directors of the
company, of his intention to transfer his shares to them under Art 11. The
defendants denied any liability to take up and pay for the shares
- Held:
o (1) On true construction of Art 11, the word “will” indicated a resultant
prospective eventuality in which member had to sell his shares and
directors had to buy them
o (2) The article created a contractual relationship between plaintiff as
a member and the defendants not as directors but as members
As a matter of construction of the articles, a member wishing to transfer his shares was able
to require the other members to take the shares and the court allowed a member to enforce
that provision against the other members. Such actions are unusual
Note that this case dealt with a small company, in which directors and shareholders were
one and the same (quasi partnership); and the judge, Vaisey J, gave a note of caution as to
the range of application of this principle:

- “The conclusion to which I have come may not be of so general an application as

to extend to the articles of association of every company, for it is, I think, material
to remember that this private company is one of that class of companies which
bears a close analogy to a partnership”