Section 36 provides that the memorandum and articles, when
registered, bind the company and its members to the same extent as if they had
been signed and sealed by each member and contained convenants on the part of
each member to observe and be bound by all the provisions of the memorandum and
articles. Thus, the company is bound to the members; the members are bound to
the company; and the members are bound to the other members by whatever is
contained in these documents. But neither a company nor its members are bound
to outsiders. These relationship are discussed herein below:
Members bound to company. Each member must observe the provisions of the articles and memorandum. For instance, a company has right of lien on members’ shares, or to forfeit the shares on non-payment of calls. Every member is bound by whatever is contained in the memorandum and articles.
Example. The articles of a company contained a clause that on the bankruptcy of a member, his shares should be sold to other person and at a price fixed by the Directors. ‘B’, a shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed that the was not bound by these provisions and should be liberty to sell the shares at the true value. Held, that the trustee was bound by the articles, as shares were purchased by ‘B’ in terms of the articles. [Borland Trustees v. Steel bros. Ltd. (1901) 1 Ch. 279].
Members bound to company. Each member must observe the provisions of the articles and memorandum. For instance, a company has right of lien on members’ shares, or to forfeit the shares on non-payment of calls. Every member is bound by whatever is contained in the memorandum and articles.
Example. The articles of a company contained a clause that on the bankruptcy of a member, his shares should be sold to other person and at a price fixed by the Directors. ‘B’, a shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed that the was not bound by these provisions and should be liberty to sell the shares at the true value. Held, that the trustee was bound by the articles, as shares were purchased by ‘B’ in terms of the articles. [Borland Trustees v. Steel bros. Ltd. (1901) 1 Ch. 279].
Each members is not only bound by the covenants of
memorandum and articles as originally framed but as altered from time to time
in accordance with the provisions of the Companies Act. The articles of
associations are the regulations of the company binding on the company and on
its shareholders. Further, the shareholders cannot among themselves enter into
an agreement which is contrary to or inconsistent with the articles of
association of the company [V.B. Rangaraj
v. V.B. Gopalakrishnan (1922) 73 Comp. Cas 201 (S.C.)].
Company bound to members. Similarly, a company is bound to members by whatever is contained in its memorandum and articles of association. The company is bound not only to the “members as a body” but also to the individual members as to their individual rights. The members can restrain a company from spending money on ultra vires transaction. An individual member can make the company fulfil its obligations to him, such as to send the notice for the meetings, to allow him to cast his vote in the meetings.
Members bound to member. The articles bind the members inter se, i.e., one to another so far as rights and duties arising from the articles are concerned.
Company bound to members. Similarly, a company is bound to members by whatever is contained in its memorandum and articles of association. The company is bound not only to the “members as a body” but also to the individual members as to their individual rights. The members can restrain a company from spending money on ultra vires transaction. An individual member can make the company fulfil its obligations to him, such as to send the notice for the meetings, to allow him to cast his vote in the meetings.
Members bound to member. The articles bind the members inter se, i.e., one to another so far as rights and duties arising from the articles are concerned.
It is well settled that the articles of association will
have a contractual force between the company and its members as also between
the members inter se in relation to their
rights as such members [Ramakrishna
Industries (p) Ltd' v. P. R. Ramakrishnan (Supra)]
Example. The articles of a company provided that whenever any member wished to transfer his shares, he was under an obligation to inform the directors of his intention and the directors were under an obligation to take the said shares equally between them at a fair value. The directors refused to take the shares of a particular member on the ground that the Articles did not impose an enforceable liability upon them. Held: The directors were under an obligation to purchase the shares, as members of the company, in terms of the provisions of the Articles. There was a personal liability of members inter se [Rayfield v. Hand (1960) Ch.1].
Whether company or members bound to outsiders? No the memorandum or articles do not confer any contractual rights to outsiders against the company or its members' even though the name of the outsiders is mentioned in the articles.
Example. The articles of a company provided that Eley should be solicitor for life to the company and should not be removed from office except for misconduct. Later on he also became a member of the company. But after employing him as a solicitor for a number of years, the company discontinued his services. He, being a member, sued the company for damages for breach of the contract contained in the articles of association. Held: His suit was dismissed on the ground that, he, as a solicitor, was no party to the articles. He must prove a contract independent of the articles. There was no infringement of his right as a member. The beach of contract was there but in his capacity as a non-member [Eley v. Positive Government Security Life Assurance Co,. (1876) 1 Ex. D.88].
Whether directors are bound by whatever is contained in the articles? Yes, the directors of the company derive their powers from the articles and be subject to limitations, if any, placed on their powers by the articles. If they contravene any provisions of articles, two parties may be affected: (1) the company itself and (2) the outsiders.
Example. The articles of a company provided that whenever any member wished to transfer his shares, he was under an obligation to inform the directors of his intention and the directors were under an obligation to take the said shares equally between them at a fair value. The directors refused to take the shares of a particular member on the ground that the Articles did not impose an enforceable liability upon them. Held: The directors were under an obligation to purchase the shares, as members of the company, in terms of the provisions of the Articles. There was a personal liability of members inter se [Rayfield v. Hand (1960) Ch.1].
Whether company or members bound to outsiders? No the memorandum or articles do not confer any contractual rights to outsiders against the company or its members' even though the name of the outsiders is mentioned in the articles.
Example. The articles of a company provided that Eley should be solicitor for life to the company and should not be removed from office except for misconduct. Later on he also became a member of the company. But after employing him as a solicitor for a number of years, the company discontinued his services. He, being a member, sued the company for damages for breach of the contract contained in the articles of association. Held: His suit was dismissed on the ground that, he, as a solicitor, was no party to the articles. He must prove a contract independent of the articles. There was no infringement of his right as a member. The beach of contract was there but in his capacity as a non-member [Eley v. Positive Government Security Life Assurance Co,. (1876) 1 Ex. D.88].
Whether directors are bound by whatever is contained in the articles? Yes, the directors of the company derive their powers from the articles and be subject to limitations, if any, placed on their powers by the articles. If they contravene any provisions of articles, two parties may be affected: (1) the company itself and (2) the outsiders.
In case of contravention of the provisions of the articles,
the directors render themselves liable to an action at the instance of the
members. However, members may ratify the act of the director, if they so
desire. But if as a result of the breach of duty any loss has resulted to the
company, the directors are liable to refund to the company any damage so
suffered.
Further, where the directors contravene the provisions of
the articles, it may affect
outsiders' interest also. This is explained below with the
help of a case, viz., Royal
British Bank v.
Turquand.
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