Page 163 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes 8.4.7 Effect of Memorandum and Articles/Binding Force of Memorandum
and Articles

Section 36 provides that the memorandum and articles, when registered, bind the company
and its members to the same extent as if they had been signed and sealed by each member and
contained convenants on the part of each member to observe and be bound by all the provisions
of the memorandum and articles. Thus, the company is bound to the members; the members
are bound to the company; and the members are bound to the other members by whatever is
contained in these documents. But neither a company nor its members are bound to outsiders.
These relationships are discussed herein below:
Members bound to company. Each member must observe the provisions of the articles and
memorandum. For instance, a company has a right of lien on members’ shares, or to forfeit
the shares on non-payment of calls. Every member is bound by whatever is contained in the
memorandum and articles.

Example: The articles of a company contained a clause that on the bankruptcy of a member,
his shares should be sold to other person and at a price fixed by the Directors. ‘B’, a shareholder

was adjudicated bankrupt. His trustee in bankruptcy claimed that he was not bound by these
provisions and should be at liberty to sell the shares at the true value. Held, that the trustee was
bound by the articles, as shares were purchased by ‘B’ in terms of the articles. [Borland Trustees v.
Steel Bros. Co. Ltd. (1901) 1 Ch. 279].
Each member is not only bound by the covenants of memorandum and articles as originally
framed but as altered form time to time in accordance with the provisions of the Companies Act.
The articles of associations are the regulations of the company binding on the company and on its
shareholders. Further, the shareholders cannot among themselves enter into an agreement which
is contrary to or inconsistent with the articles of association of the company.
Company bound to members. 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 fulfil 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.

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