Company Law Analysis - Essay Example

Order 160034     COMPANY LAW The memorandum of association of a company is the most important document as it sets out the constitution of the company. It is the foundation on which the structure of the company is based. It prescribes the name of the company, its registered, office, objects and capital. It also defines the extent of its powers. A company can exercise only such powers which are either expressly stated therein or as may be implied there from including matters incidental to the powers so conferred. Memorandum is therefore a document of great importance in relation to the proposal company (Palmer “Company Law (20th ed.)P.56. It is infact a charter of a company. According to companies Act, Memorandum means memorandum of association of a company as originally formed or altered from time to time in pursuance of any previous company’s law. Lord Cairns in Ash bury Co. v. Riche (1875) LR 7 HL653 observed: “The memorandum defines the limitations of the powers of the company…it contains in it, both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and powers which by law are given to the corporation, and it states negatively, if it is necessary to state, that nothing shall be done beyond that ambit. Lord Macmillan has defined memorandum of association and observed: “It sets out the constitution of the company, it is so to speak the charter of the company, and provides on which the structure of the company is built. The importance of the memorandum lies in the fact that it defines the scope of companies’ activities as well as its relation with the outside world. Its purpose is to enable the shareholders, creditors and those who deal with the company to know what its permited range of its enterprise. The Articles of Association of a company are the internal regulations which govern the management of the internal affairs of a company. The articles are meant to regulate the internal affairs of a company. The members have full control and may by resolution alter them as they think fit so long as they do not exceed the limits defined by the memorandum or the Companies Act. The Companies Act defines Articles of Association as: “Articles means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies for this Act.” Thus it would be seen that the “Articles of a company are its bylaws or rules and regulations which govern its internal affairs and the conduct of its business. They are of vital importance to the company in as much as they deal with the rights of the members of the company in Ash bury Railway carriage and iron Ltd v Riche (1875) LR 7HL 653 in the following words: “The articles play a part subsidiary to the memorandum of association. They accept the memorandum as the charter of incorporation of the company, and so accepting it, the articles proceed to define the duties, rights and powers of governing body as between themselves and the company at large, and the mode and form in which it business of the company is to be carried on, and the mode and form in which changes in internal regulations of the company may from time to time be made. The scope of the so called statutory contract under section 20, Companies Act, has been as Lord Greene M.R said “The subject of considerable controversy about it in the future “(Beatie V.E and F Beatie Ltd) (1918) ch. 708,721). Whether these words were uttered with exasperation, desperation, or resignation cannot be gauged from the law report. The section reports “Subject to the provisions of this Act, the memorandum and articles shall, when registered, bid the members and the company therefore to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles”. The true scope of this provision, however does not need to be terminated, not at least because the extent to which a shareholder can enforce its measures one extent which the rule in Toss vs. Harbottle (All E.R 84) will not defeat a minority action Although section 75, companies Act 1980 may ease the burden of the minority, it is very doubtful whether its effect will be to make the statutory contract redundant. The new provision is “Any member of a company may apply to the court by petition for an order under this section on the ground that the affairs of the company are being or have been conducted in a manner (including at least himself) or that any actual or proposed act or omission of the company (including an Act or omission on its behalf) is or would be prejudiced clearly, the company itself cannot initiate proceedings under the section (although a member can ask the court to allow him to use the company’s name). If therefore a member fails to discharge some pecuniary liability on his shares, the company must proceed under section 20. Fortunately the new section has been relieved off some of the unduly restrictive elements of its predecessor (5.20 Companies Act 1948), such as proof that a winding up order could be obtained. By 5. 14(1) Companies Act 1985, the memorandum and articles bind the company and the members as if they had been signed and sealed by each member and contained covenants on the part of each member to observe their provisions. This section of companies Act 1985 has the following effects:- a) The company is bound to each individual member in his capacity as a member: Thus for example it must record a properly given vote. However it is not bound by a right given by the articles to a member acting in another capacity, i.e. a company solicitor. In Eley v. Positive Life Assurance Co. (1976) the articles contained a clause appointing the plaintiff as company solicitor, and be acted as such for sometime. The company then ceased to employ him and he brought an action for breach of contract. It was held that the articles did not constitute a contract between the company and Eley because even though he was a member they could not confer rights on him in any other capacity, including that of a solicitor. b) Each member is bound to the company: The provision in the article referring disputes between the member and the company for arbitration will be enforceable against the member provided the dispute concerns membership rights. In Hickman v. Kent Sheep Breeders Association (1915), the articles provided for disputes between members and the company to be referred for arbitration. The association wished to expel the plaintiff from membership of the Association and the plaintiff applied for an injunction to prevent this. It was held that the Association was entitled to have the action stayed since the dispute concerned membership rights and the articles provided for such disputes to be settled by arbitration rather than by legal action. c) The members are contractually bound to each other: The main occasions when this question is likely to arise are when the articles give members pre-emption rights that another member wishes to sell his shares, or more rarely, when the articles place on members a duty to buy the shares of a retiring member. In such cases, a direct action between the shareholders concerned is theoretically possible. However, a situation where members are able to sue other members may well give rise to practical difficulties. To avoid this, modern articles will make the transaction a two stage, each stage being dealing with the company to which S 14 clearly applies. The articles first require any member who intends to transfer his shares to inform the company. They then require the company to give notice to other members that they have an option to purchase the shares. If the first stage is not complied with, the company can sue the transferor. If the second stage is broken a shareholder may sue the company. d) Differences between S 14 and other contracts: (i)The normal remedy for damages for breach of contract is not available because of the court’s desire to maintain the capital of the company. A member may however obtain an injunction to prevent a breach by the company of any provision in the memorandum or articles and he may sue for a liquidated sum due to him as a member i.e. unpaid dividends. (ii) The contract does not guarantee the future rights and duties of members, since both the memorandum and articles may be altered. Thus, when becoming a member, a person agrees to a contract which is alterable by the other party (the company) at a future date. By section 33(i) the provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions. By this, it means that the constitution of the company will be the only document regulating the operations of the company. Therefore all the provisions that are contained in the constitution must be obeyed by the members of the company. Since it is difficult to enter into a contract between the company and each individual member, the provisions in the constitution of the company serve as a contract or covenant. In this regard the constitution or establishes the relationship between the company and individual members. Members must obey and follow the provisions as set in the constitution. Violation of any provisions will lead to either member or company being sued for violation Bibliography 1 Wikipedia, Free encyclopedia. 2. Dr. N.V. Paranjape, Company law, second edition, 2000. 3. www.icaew.co.uk 4. P. Norman, K. Abbott, et al, Business Law, 7th edition 2002. 5. German Law Journal No. 10 (1 October 2005) 6. http://www.yale.edu/yalelj Read More