ENFORCEMENT OF AOA

ENFORCEMENT OF AOA Under section 17 of the Companies Act 2006 (CA 2006), a company's constitutional documents include the company's articles of association (AOA) along with any resolutions and agreements. Unlike the previous Companies Acts, the significance of a company's memorandum of association (MOA) has been reduced and the AOA is now the company's main constitutional document. In short, the MOA is the charter of the company which defines the scope of its activities and the AOA, on the other hand, regulates the internal management of the company by setting out the internal rules of the company "that the organs of the company must comply with" as explained by Taylor Wessing in "Key Terms of the Articles of Association’" (2001). The AOA is compulsary in every company by virtue of s18 and more often that not, the model articles under s19 and the Companies (Model Articles) Regulations 2008 would be adopted, with slight amendments. Under s33 CA 2006, it is clear that the AOA constitutes a statutory contract between the members and the company. (Hickman v Kent or Romney Marsh Sheepbreeders Association) Thus, similarly as an ordinary contract, the provisions of an AOA can be enforced "as if they were covenants" by the company against its members, by the members against the company, also by members against members inter se. (Gower&Davies "Principles of Modern Company Law" (2008)) The rationale behind the need for a statutory contract between a company and its members is that this is necessary to bridge the changeover between the deed settlement company and the new registered company formed under the Joint Stock Companies Act 1844. Prior to 1844, most companies were unincorporated and businessmen were in a good position to take advantage of the corporate personality in the absence of a statutory contract; and thus, there were ample rooms for fraudulent promotions. However, unlike an ordinary contract, the statutory contract - the AOA, does have some distinct features, as explained by the Court of Appeal in Bratton Seymore Service Co Ltd v Oxborough. For example, it originates from the statute instead of a bargain between the parties; it will not be made invalid on grounds of general defences such as misrepresentation, mistake and duress; it binds not only the present members but also future members; and an amendment of the AOA requires a special majority, that is three-quarters of the members' votes in favour of the resolution (s21), compared to the need to obtain the consent of all parties in an ordinary contract. Most significantly, unlike an ordinary contract where the parties can enforce all the terms of the contract, not every member can enforce a right contained in the AOA against the company. In fact, as seen in the question at hand, it is doubtful whether the enforcement of the AOA is as effective as enforcing a contract. (This is in relation to members wishing to enforce the AOA against the company; in situations where the company is enforcing the AOA against its members or where the members are enforcing the AOA against each other, the enforcement here are more straightforward) Thus, in order to evaluate the extent of the validity of the statement at hand, we must inquire into the case laws concerning the enforceability of an AOA in this area; in particular, the issue is who can enforce the AOA and what can be enforced. As noted by Alan Dignam, the enforcement of AOA provisions is not as straightforward compared to ordinary contracts as the law on s33 has been "dominated by layer upon layer of contradictory case law and constant academic debates". Although the CLRSG and the Consultative Document 2005 did recognise this problem and recommended some long-needed reforms, as can be seen, the final reforms in the CA 2006 are somewhat disappointing. The complexity here can be illustrated by the rule in Foss v Harbottle which states that, where a wrong complained of (for example, the breach of the AOA provision) is done to the company, the company is the 'proper plaintiff'. The problem is that, as highlighted by Lord Wedderburn in his article "Shareholders Rights and the Rule in Foss v Harbottle" (1957), the distinction between a breach of ‘personal right’ and a breach which amounts to an ‘internal irregularity’ is a difficult one to make. For example, although in Pender v Lushington, the refusal to count the votes of minority shareholders constituted a breach of personal rights and was actionable on ground of discrimination, the refusal to recognize an individual shareholder's vote in MacDougall v Gardiner was an internal irregularity. Thus, judges who are strongly of the view that the courts should not interfere with the company's internal affairs would not allow the shareholders to sue but for other judges who emphasize on the contractual nature of the company's constitution, the shareholder may be allowed to enforce it; as such, this leads to contradictory case laws. The classic cases to illustrate this complexity are Eley v Positive Life Association and Quin & Axtens Ltd v Salmon. In the first case, where the AOA contained a clause which provided that a particular member would be appointed as a company's solicitor, but he was not appointed as such and subsequently tried to sue for the breach of that clause, it was held that the AOA provision the member was relying on was not enforceable as there was no contractual relationship between the member 'as a solicitor' and the company. As a rule of thumb, it was stated that the statutory contract only binds the members in their capacity as member and not 'outsiders'. However, in the latter case, where the company's AOA provided that the consent of both managing directors was needed for certain decisions, but was subsequently not complied with, the House of Lords held that the clause was enforceable even though it indirectly enforced the rights given to a member in his capacity as a director. Thus, from Eley and Quin, it seems that there are two school of thoughts on the enforceability of an 'outsider right'; whilst Eley asserts that members strictly cannot enforce an 'outsider right', the House of Lords in Quin nevertheless held to otherwise. The question then is which authority should be prevail? There has been much discussion as to the capacity in which the AOA provisions are to be enforced and whether the enforcement encompasses the entire articles or is limited to 'insider rights'. Perhaps some guidance can be provided by the subsequent case of Hickman v Kent where the court held in favour of Eley's school of thought. In this case, where the AOA provided that disputes between the company and its members should be referred to arbitration but in a subsequent dispute between a member and the company, the member commenced proceedings instead of arbitration, it was held that the member was bound by the articles. In delivering the judgment, Astbury J stated that: "... No article can constitute a contract between a company and a third person... No right given by an article to a member in a capacity other than as a member, for instance, as a solicitor, promoter, director, can be enforced against the company". Thus, a member can only enforce a membership/insider right which is contained in the articles such as the right to attend and vote at general meetings (Pender v Lushington), and the right to a declared dividend (Wood v Odessa Waterworks Co) but rights such as the right to be a company's solicitor (Eley) and the right to be a company director (Beattie v E&F Beattie Ltd) are non-enforceable by a member as it is an 'outsider' right. A similar approach was taken in Globalink Telecommunications Ltd v Wilmbury Ltd. These cases reflects the judicial reluctance to interfere with the company's internal management as highlighted above. However, the problem with this approach is that it is in conflict with s33. Although Eley states that only membership rights can be enforced, the latter does not make any distinction between 'insider' and 'outsider' rights and simply states that 'those provisions' must be observed. As highlighted by Gideon Shirazi in his article "To What Extent does the Section33 Contract Differ from an Orthodox Contract?", this was the main reason why the Hickman decision is often challenged and the reason why the House of Lords in Quinn & Axtens departed from the Eley school of thought. According to Gideon Shirazi, there is no reason why the courts in Beattie and Hickman chose to ignore the decision in Quinn & Axtens and placing the emphasis on the Hickman decision. In fact, in Beattie v E&F Beattie Ltd, although it was held that the AOA clause was not enforceable, the Master of the Rolls suggested that 'had the action been framed as a member-director action in which the central issue was a member suing to enforce the articles which had the tangential effect of enforcing an outsider right, rather than a director-member action in which the enforcement of the director's rights were central rather than tangential, the action might have been successful'. Lord Wedderburn, in his article "Shareholders Rights and The Rule in Foss v Harbottle' (1957), is also of the opinion that every member has a personal right to see the company running according to the articles, except those already identified as concerning the internal procedures only and this view has been broadly accepted by other academics such as Gregory, Goldberg and Drury. Although there are contrasting opinions such as Professor Gower's who favours the traditional interpretation of s33 (the Eley school of thought), Anthony Nwafor explains that these contrasting views are unhelpful as it is based on a theory of law, rather than substance and it fails to take into account cases such as Salmon. However, Anthony Nwafor , in his article ‘The Unending Debate on the Contractual Effect of the Company’s Constitution – A Comparative Perspective’ (2013), believes that Lord Wedderburn’s proposition in practice only scratches the surface of the reforms actually needed; the implications of s.33 are limited in practice and commercially unrealistic for only shareholders alone have a constitutional contract with the company and directors do not, given that directors are the “pillars” of a company. It is noteworthy that the Company Law Review has also recommended that individual shareholders should have the right to enforce all provisions in a company’s constitution both against the company itself and against other members unless the constitution expressly provides otherwise. Unfortunately, however, the proposal was shelved by the legislature and no change has been brought yet. Just when we thought that the law is already complex and confusing in this area, GD Goldberg and Dr Prentice suggests a third school of thought. In their article, “The Controversy on the Section 20 Revisited”, a middle ground was suggested. It was argued that a member has a contractual right to have the affairs of the company conducted in a manner consistent with the AOA; the key question here is whether the company acted constitutionally or not. If the company has not acted constitutionally, the member can then enforce the statutory contract to ensure that the company does so, even though this may also incidentally enforce an ‘outsider' right. Other than this, no further enforcement of ‘outsider' right is permissible. In conclusion, the current law on the enforcement of a company's AOA is still complicated and confusing. Whilst the Eley's school of thought asserts that members may only enforce strict 'insider' rights in the AOA, the case of Salmon and the various academics such as Lord Wedderburn and Anthony Nwafor suggests that it is possible to enforce an 'outsider' right if done so in the capacity as a member. Goldberg and Prentice on the other hand suggests a third school of thought which questions whether the company is acting in accordance with the AOA. Thus, it is submitted that further reforms are needed to clarify the distinction between insider and outsider rights and to achieve more consistency in this area of law. As Atiyah has argued through his many writings, there is not one singular model that all contracts must follow, but all parties to a contract should be able to enforce the contractual terms against the other party; not only does s33 contradict with Atiyah’s view of an orthodox contract, it also makes unclear the exact form and legal effect of a company’s constitution.