Courts have interpreted Section 22(1) to mean that when he articles are registered, there comes into being a contract between the company one on one hand and its members on the other. This contract confers rights and imposed obligations on the parties therefore. The company and its members are obliged to observe the provisions of the articles and either party may sue the other for non compliance with the articles. The existence of this contract was first acknowledged in WeltonV. Saferry (1892)where Lord Herschell observed, “It isquite true that the articles constitute a contract between each member and the company”.
In Hickman V. Kent (1915)article 49 of the company‟s articles provided that any dispute between a company and any of its members be referred to arbitration. A dispute arose between Mr. Hickman who was a member and the company secretary. Hickman sued the company. The company applied for a stay of the proceedings for the dispute to be referred to arbitration in accordance with the articles. The court granted a stay on the grounds that the articles constituted a contract between the company and its members.
Nature of the Contract:
The contract created by Section 22(1) in relation to the articles has certain special characteristics of which are laid down by Ashbury J in Hickman V. Kent.
1. It is a contract between the company and its members only. In the words of the Judge, “no articles can constitute a contract between the company and third persons”.
2. The contract confers rights and imposes obligations on the company and its members.
3. The rights conferred by the contract can only be enforced by members in their capacity as members. In the words of the judge, “No right merely purporting to the conferred by the articles to a person in a capacity other than that of a member e.g. director, promoter can be enforced against the company”.
In Eley V. Positive Govt. Life Assurance Co. Ltd. The articles of the defendant company provided that Mr. Eley be employed as company solicitor to transact 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. 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 that of a member.
A similar holding was made in Bealfie V. Bealfie Ltd. (1938) where it was held that the article in question would not be given effect since it referred to directors in their capacity as directors. In Rayfields V. Hands (1960) article 11 of the articles provided that any member wishing to transfer the shares had to inform the directors who were to take up the shares equally between them at a fair value. Rayfields who held 725 share sinformed the directors of his intention to transfer the shares. The directors who were also members refused to take up the shares. Rayfields sued to enforce article 11. 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 Vaisey J., “In my judgement, the relationship here is between the plaintiff as a member and the defendants not as directors but as members.
4. The contract created by the articles must be consistent with the provisions of the memorandum and the Companies act.
5. The terms of the contract created by the articles keep on changing from time to time whenever the company alters the articles in exercise of powers conferred upon it by Section 13(1) of the Act.
Obiter
Courts have observed as a by the way that when the articles are registered another contract comes into existence. The second contract is between members themselves i.e. members interse. In the words of Starling J in Wood V. Odessa Works Co.,“The articles of association constitute a contract not merely between the shareholders and the company but between each individual shareholder and every other. Words to that effect were expressed in Quinn and Axtens Ltd. V. Salmon. The so called contract is generally unenforceable, amember cannot use another to enforce the articles. However, the contract may be enforced:
(a) By the liquidator in the course of winding up
(b) By a shareholder under the exceptions to the rule in Foss V. Harbottle (1843).