Page 240 - DMGT407Corporate and Business Laws
P. 240
Unit 10: Articles of Association
5. The alteration in articles must be ……………….for the benefit of the company as a whole. Notes
6. An alteration of articles to effect a conversion of a public company into a private company
cannot be made without the approval of the ……………………….
10.3 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 covenants 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:
10.3.1 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 for 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 vs. 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 from time to time in accordance with the provisions of the Companies Act.
The articles 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 the company.
10.3.2 Company Bound to Members
Similarly, a company is bound to members by whatever is contained in its memorandum and
articles. 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.
10.3.3 Members Bound inter se
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 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.
LOVELY PROFESSIONAL UNIVERSITY 233
