218 14: Constitution of a company Part D The formation and constitution of business organisations
Hickman v Kent or Romney Marsh Sheepbreeders Association 1915
The facts: The claimant (H) was in dispute with the company which had threatened to expel him from
membership. The articles provided that disputes between the company and its members should be
submitted to arbitration. H, in breach of that article, began an action in court against the company.
Decision: The proceedings would be stayed since the dispute (which related to matters affecting H as a
member) must, in conformity with the articles, be submitted to arbitration.The principle that only rights and obligations of members are covered applies when an outsider who is
also a member seeks to rely on the articles in support of a claim made as an outsider.Eley v Positive Government Security Life Assurance Co 1876
The facts: E, a solicitor, drafted the original articles and included a provision that the company must
always employ him as its solicitor. E became a member of the company some months after its
incorporation. He later sued the company for breach of contract in not employing him as its solicitor.
Decision: E could not rely on the article since it was a contract between the company and its members and
he was not asserting any claim as a member.The members are able to compel the company to obey the Articles: Pender v Lushington 1877.4.2 Constitution as a contract between members
The Companies Act gives to the constitution contractual effect between (a) the company and (b) its
members individually. It can also impose a contract on the members in their dealings with each other.Rayfield v Hands 1958
The facts: The articles required that (a) every director should be a shareholder and (b) the directors must
purchase the shares of any member who gave them notice of his wish to dispose of them. The directors,
however, denied that a member could enforce the obligation on them to acquire his shares.
Decision: There was 'a contract ... between a member and member-directors in relation to their holdings
of the company's shares in its articles' and the directors were bound by it.Articles and resolutions are usually drafted so that each stage is a dealing between the company and the
members, so that:
(a) A member who intends to transfer their shares must, if the articles so require, give notice of their
intention to the company.
(b) The company must then give notice to other members that they have an option to take up their
shares.4.3 Constitution as a supplement to contracts
The constitution can be used to establish the terms of a contract existing elsewhere.If an outsider makes a separate contract with the company and that contract contains no specific term on
a particular point but the constitution does, then the contract is deemed to incorporate the constitution to
that extent.
If a contract incorporates terms of the articles it is subject to the company's right to alter its articles.
However a company's articles cannot be altered to deprive another person of a right already earned, say
for services rendered prior to the alteration.Point to note Remember the articles only create contractual rights/obligations in relation to rights as a member.FAST FORWARD