Page 241 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes
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].

10.3.4 Whether a Company or Members Bound to Outsiders?

The memorandum or articles do not confer any contractual rights to outsiders against the
company or its members, even though the name of the outsider 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.
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].

10.3.5 Whether Directors are Bound by whatever is Contained in the
Articles?

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 vs. Turquand
(1856) 119 ER 886.

Notes The legal effect of articles may be summed up as follows:
1. The articles constitute a contract between the company and its members.
2. The articles bind the members to the company.
3. The articles bind the company to members as members.

4. The articles bind members to members.
5. The articles do not bind the company to outsiders.
6. The articles do not bind the company to any member in a capacity other than that of
a member.

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