Binding effect of Memorandum and Articles of Association | Company Law - CLAT PG PDF Download

Binding Effect of Articles and Memorandum

Once a company’s Articles and Memorandum are registered, they bind the company and its members as if each member had signed them. However, the company’s articles, while binding, do not hold the same weight as statutory law.

Binding the Company to Its Members

• The company is obligated to follow its articles and is bound to its members.
• If the company breaches the articles, such as by engaging in ultra vires or illegal transactions, members can seek an injunction to stop the company.
• Members have the right to sue the company to enforce their personal rights outlined in the Articles, like the right to receive declared dividends.

Only shareholders/members, in their capacity as members, can enforce the Articles' provisions. For example, in the case of Wood v. Odessa Waterworks Co., the court ruled that the directors could only pay dividends in cash, as specified in the Articles.

Members Bound to the Company

• Each member is obligated to adhere to the provisions of the memorandum and articles, treating any payment due to the company as a debt.
• Members are bound by the articles as if they had all signed and agreed to them.
• In Borland’s Trustees v. Steel Bros. & Co. Ltd., when a member went bankrupt, the articles stipulated that his shares would be sold at a price set by the directors.
• When Borland went bankrupt, his trustee wanted to sell the shares at their original value and argued he was not bound by the articles.
• However, the court held that the trustee had to follow the company’s articles because the shares were purchased according to them.

Binding Between Members

The articles of association create a contract among the members of the company. However, these rights can only be enforced by or against a member of the company. In some cases, courts have extended the articles to create a contract between individual members.

Case of Rayfield v Hands

• Rayfield, a shareholder in a company, was required by the articles to inform the directors if he wanted to transfer his shares.
• The directors were then obligated to buy those shares at a fair value.
• Rayfield followed the articles and informed the directors, but they refused to buy his shares.
• The court ruled against the directors, forcing them to buy Rayfield's shares at a fair value.
• The court also stated that Rayfield did not need to be a member of the company to sue the directors.

No Binding in Relation to Outsiders

Unlike the binding nature of the articles among members, neither the memorandum nor the articles create a contract between the company and any third party. The provisions of these documents do not bind the company and its members to outsiders.

Case of Browne v La Trinidad

• In this case, the articles of the company included a clause suggesting that Browne should be a director who could not be removed.
• Despite this, Browne was removed from his position, leading him to take legal action to prevent the company from removing him.
• The court ruled that there was no contract between Browne and the company since Browne was considered an outsider.
• As an outsider, Browne could not enforce the articles against the company, even though the articles mentioned him or granted him certain rights.

This case illustrates that outsiders cannot misuse the articles to make claims against the company.