Page 86 - DCOM106_COMPANY_LAW

Unit 6: Articles of Association

6.8.2 Company bound to Members Notes

Similarly, a company is bound to members by whatever is contained in its memorandum and
articles of association. The company is bound not only to the “members as a body” but also to
the individual members as to their individual rights. The members can restrain a company from
spending money on ultra vires transactions. An individual member can make the company
fulfill its obligations to him, such as to send the notice for the meetings, to allow him to cast his
vote in the meetings.
Members bound to member. The articles bind the members inter se, i.e., one to another so far as
rights and duties arising from the articles are concerned.
It is well settled that the articles of association will have a contractual force between the company
and its members as also between the members inter se in relation to their rights as such members.

Example: The articles of a company provided that whenever any member wished to
transfer his shares, he was under an obligation to inform the directors of his intention and the
directors were under an obligation to take the said shares equally between them at a fair value.
The directors refused to take the shares of a particular member on the ground that the Articles
did not impose an enforceable liability upon them.
Held: The directors were under an obligation to purchase the shares, as members of the company,
in terms of the provisions of the Articles. There was a personal liability of members inter se
[Rayfield v. Hand (1960) Ch.1].

Whether Company or Members bound to Outsiders?

No, the memorandum or articles do not confer any contractual rights to outsiders against the
company or its members, even though the name of the outsiders is mentioned in the articles.

Example: The articles of a company provided that Eley should be solicitor for life to the
company and should not be removed from office except for misconduct. Later on he also became
a member of the company. But after employing him as a solicitor for a number of years, the
company discontinued his services. He, being a member, sued the company for damages for
breach of the contract contained in the articles of association.
Held: His suit was dismissed on the ground that, he, as a solicitor, was no party to the articles. He
must prove a contract independent of the articles. There was no infringement of his right as a
member. The breach of contract was there but in his capacity as a non-member [Eley v. Positive
Government Security Life Assurance Co., (1876) 1 Ex. D. 88].
Whether Directors are bound by whatever is contained in the Articles?
Yes, the directors of the company derive their powers from the articles and be subject to
limitations, if any, placed on their powers by the articles. If they contravene any provisions of
articles, two parties may be affected: (1) the company itself and (2) the outsiders.

In case of contravention of the provisions of the articles, the directors render themselves liable
to an action at the instance of the members. However, members may ratify the act of the
director, if they so desire. But if as a result of the breach of duty any loss has resulted to the
company, the directors are liable to refund to the company any damage so suffered.
Further, where the directors contravene the provisions of the articles, it may affect outsiders’
interest also. This is explained below with the help of a case, viz., Royal British Bank v. Turquand
(1856) 119 ER 886.

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