Articles of Association Essay The judiciary has made a real mess of interpreting the section 33 contract. Discuss.

The Judiciary has made a real mess of section 33 contracts (previously known as Section 14 of Company law Act 19 !" #y $ivin$ contradictory cases #ut a more astonishin$ point to #e noted is that recent reforms in the Company %aw act &''( on this area didn)t cleaned up that area* +nder S*1,- company)s constitution involves Articles of Association (AA" and Special .esolutions or a$reements* Accordin$ to section - /emorandum is not part of the constitution anymore* Section 33 CA creates a contract #etween Shareholder (hereafter known as /em#ers" and the company itself* Section 33 contract is there to state out ri$hts and o#li$ations of the mem#ers and now e0pressly stated that Company also has o#li$ations till the same e0tent like mem#ers under the AA* Althou$h- previous cases already accepted the fact that company also has o#li$ations* 1n 2ickman v 3ent- the court confirmed that AA creates a s*33 contract #etween company and its mem#ers* There was clause in the company)s AA statin$ that in the event of dispute with the company- the means of resolvin$ the dispute shall #e ar#itration* The mem#er sued the company for some dispute and the company defended #y sayin$ they have to $o throu$h the ar#itration since there is a clause in the AA #y which the mem#er a#ides and the court ruled in the favor of the company on this point* 2owever- this contract has #een in a mess when it comes to enforcea#ility of the ri$hts* Some mem#ers have tried to enforce their ri$hts in AA directly upon other mem#ers which they are claimin$ to have a inter Se ri$ht* The Case law in this area is $rey #ecause of the inconsistent verdicts* Salmon v 4uin 5 A0ten provides that mem#ers cannot enforce inter se ri$hts on other mem#ers since the contract is #etween the company and the individual mem#ers* 2owever- 1n .ayfield v hands where the 6uestion was if a mem#er can compel another mem#er directly to #uy his shares7aisey J said that 1nter Se ri$hts are enforcea#le #ut he also acknowled$ed that only when there is 6uasi8partnership case and may not $enerally apply* Academic view in this area is also divided* 9arc and 9lown su$$ested that 1nter Se ri$hts are not enforcea#le e0cept for the situation when there is 4uasi partnership* :avies opines that 1nter Se ri$hts should #e enforcea#le and he #acks up with polices reasons that #y allowin$ inter se will mean the mem#er can sue another mem#er directly without suin$ throu$h the company which will increase the num#er of lawsuits and will also #e waste of resources and it also hi$hli$hts 4uin 5 A0ten approach encoura$es minority #ein$ oppressed #y ma;ority mem#ers* As we come #ack to our 4uote- we can see how case law is divided creatin$ a mess and uncertainty whether 1nter Se ri$ht are enforcea#le or not* .ayfield is preferred #ut it should #e noted that it is only an Chancery decision which doesn<t help much to clear ;udicial precedent* The C%.S= recommended that all ri$hts shall #e enforced unless contrary provided in the AA in their >inal report #efore CA &''( #ut the $overnment re;ected this proposal #y sayin$ that it will create a lot of people incorporatin$ e0clusion clauses leadin$ to 1

lack of uniformity* ?nforcement of ri$hts in the AA per se 6ua outsider particularly :irectors is also one of the area which needs clarification* 1n ?ley v @ositive life Assurance- a mem#er had a ri$ht under the AA to #e solicitor of the company for life* The mem#er was later dismissed and he sued under AA statin$ that he had a ri$ht under AA* The Company ar$ued that the ri$ht to #e a solicitor for life was not a ri$ht which a mem#er en;oys #ut rather was in the capacity of a mere solicitor who was not a party to the contract and thus an outsider* The court accepted the solicitor ri$ht was an outsider ri$ht and not enforcea#le* =ower a$rees with ?ley<s approach* Similarly in 9eatlie v 9eatlie and =lo#allink Telecommunications (su$$ested outsider ri$hts may #e enforce under a separate contract like employment contract"- the courts said ri$hts tryin$ to #e enforced which are 6ua director and not 6ua mem#er shall not #e enforced since AA only #inds shareholders in the capacity of a mem#er* Thus- Ash#ury J raised a point that only mem#ership ri$hts will #e enforced under S*33* 2owever- the pro#lem is that there is no particular definition of what amounts to mem#ership ri$ht* Thus leadin$ to uncertainty and on the top of that there are cases like Salmon v 4uin 5 A0ten sayin$ Autsider ri$hts are enforcea#le* %ord Bedder#urn (in an Article" pointed out that these conflictin$ cases can #e reconciled* 1f a shareholder ar$ues that #y enforcin$ his mem#er ri$ht which Tan$entially affect his ri$ht as a director then his action could succeed since he is merely enforcin$ his mem#er)s ri$hts* Cevertheless- we are left with illusion that a mem#er ri$ht can tan$entially affect non mem#er ri$ht #ut it can also #e presented in another way #y sayin$ non8mem#er ri$ht tan$entially affects mem#er ri$ht* 1t purely depends which view is taken #y the ;ud$e and ultimately leavin$ us in uncertainty* %ocus Standi means who has the capacity to sue* /any times a mem#er cannot sue for #reach of some articles unless it amounts to personal wron$* 1f #reach of Articles amounts to a corporate wron$ then the mem#er cannot sue for no wron$ done to him as per >oss v* 2ar#ottle rule* As always- company is a separate le$al entity and has his own ri$ht to sue* Bhat creates a difficulty is that who decides what amounts to personal wron$ or corporate wron$* The ;udiciary should have $iven some $uidelines #ut there are no such $uidelines* %ord Bedder#urn $ave a su$$estive list of e0amples on personal ri$hts #ut case law su$$ests contrary to that list* :i$nam 5 %owry states that it mi$ht ;ust depend which ;ud$e you $et on your trial day* Co clear line have #een $iven #y ;udiciary and on the top of that those conflictin$ cases su$$est it ;ust couldn<t #e more in mess* A fine line can #e seen from @ender v %ushin$ton where denyin$ votin$ ri$hts was @ersonal wron$ #ut in /acdou$all v =ardiner where the company did not arran$ed the meetin$ was corporate wron$* AA is a constitution document yet- its operation is DComple0- Confusin$Contradictin$ plus >rustratin$E as descri#ed #y :i$nam 5 %owry* %ike any other constitution- it needs to #e altered accordin$ly* Section &1 of CA &''( confers a power that AA can #e altered if Special .esolution (,!F" a$rees to it* Since AA is the S*33 contract- it is 6uite ironic to a usual contract that the rest of &!F despite their disa$reement have to accept the chan$e in the contractG it has #een viewed as an unorthodo0 contract under Shuttleworth v Co0* Any provision in the AA restrictin$ it 2

from alteration is void* 2owever- a particular Article in the AA could #e entrenched under s*&& CA and makin$ it difficult to #e altered #ut there are few conditions that entrenchment must #e fulfilled durin$ formation of AA and if done later then every#ody need to a$ree to entrenchment* The courts do play a residual supervisory role in that alteration must #e #ona >ide and must #enefit the company as su$$ested under Allen v =old reef* Su#se6uently- it has #een su$$ested from procedural law point of view that it is difficult to esta#lish /alice or not 9ona >ide* This leaves us to say once a$ain that ;udiciary has created a mess in the Alteration of AA area- which was clean until checks and #alances* Bith so many pro#lems with S33 contract- most companies< especially small companies are movin$ forward to Shareholder A$reements* 1t is a normal Contract #etween shareholders which means the new shareholders are not #ound #y the old shareholder a$reements #ecause of privity of contract* >urthermore- in .ussel v Corthern 9ank- the court came up with a interestin$ interpretation of the contract and said the company can increase capital #ecause it en;oys a ri$ht under AA #ut those mem#ers party to the Shareholder A$reement cannot vote for increasin$ capital* Shareholder A$reement is #ecomin$ interestin$ since shareholders en;oy freedom of contract*

The %aw Commission has reco$niHed some of the pro#lems mentioned a#ove #ut nevertheless choose not to reform it in the statue (CA &''(" and ;ustified their stand that the shareholders have alternative recourse S*4!9 (now S*994" petition for unfairly pre;udicial conduct* As mentioned a#ove the C%.S= in D:evelopin$ the >rameworkE recommended to enforce all ri$hts unless contrary provided was turned #y the le$islators* %ord Bedder#urn ta#led an amendment to s*33 in 2ouse of %ords which would have clarified the current law #ut the $overnment re;ected his amendment* To conclude- 1 would say in $eneral CA &''( have reformed company law arena #ut S*33 is one of the few thin$s which they have left out* Thus- it makes it comple0 not only for the shareholders #ut also uncertainty with enforcement of their ri$hts*