Company law revision question and answer

Usiku Holdings Ltd is a private company Limited shares. A clause in its articles of Association provides:

“If any member intends to transfer shares he shall inform the director who will take the said shares equally between them at fair value”

Usiku holdings has made no profits for three years running, and one of its shareholders,
Kamau, now wants to get rid of his share. He request the company‟s management to buy his100 shares at the price of Sh. 10per share, which is double the original purchase price five years earlier. The company rejects his proposition and argues that there is in any case no obligation to take back the shares. Advise Kamau.
answer
The nature of contract created section 22(1) of the companies Act in relation to the articles has certain special characteristics.

The rights conferred the contract can only be enforced members in their capacity as members.

In the words of the Judge,” No right merely purporting to be conferred the articles to aperson in a capacity other than that of a member e.g. director, promoter can be enforced against the company”.
In Eley V. Govt life Assurance Co Ltd. the articles of the defendant company provided that Mr. Eley be employed as company solicitor to transfer all the company‟s legal business at a fee. He could only be removed from office for misconduct.

After incorporation, Eley was appointed solicitor and transacted the company‟s legal business for some time. He then bought shares and became a member of the company. After some time the company ceased to employ him preferring other solicitors. He sued the company to enforce the contract contained in the articles. It was held that the article was unenforceable since Eley was an outsider.

Though he was a member, he was suing to enjoy rights accruing to him in a capacity other than of a member.
A similar holding was made in Beattie V. Beattie Ltd (1938) where it was held that the article in question would not be given effect since it referred to director in their capacity as directors.

In Rayfields V. Hands (1960) article ii of the articles provided that any member wishing to transfer shares had to inform the directors who were to take up the shares equally between them at a fair value. Rayfields who held 725 shares informed the director of his intention to transfer the shares. The directors who were also members refused to take up the shares. Rayfields sued to enforce article ii. It was held that the article was enforceable since it referred to the category of directors who are members of the company. In the words of Vaise J.

“In my judgement the relationship here is between the plaintiff as a members and the defendants not as directors but as members”

In the case of Kamau, it would depend with whether the directors are members of the company, in which case he would succeed in an action against them.

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