Articles of Association Articles of Association Most important

Articles of Association

Articles of Association Most important document in a company Called “the constitution of a company” • Sec 4(1) To register a co. the articles of Association signed by each of the initial shareholders must be submitted together with other documents.

Contents of Articles Sec 13 – The articles of association of a company can provide for - any matter not inconsistent with the provisions of this Act, and -in particular can provide for (a) the objects of the company ; (b) the rights and obligations of shareholders of the company ; (c) the management and administration of the company.

Application of Model Articles Sec 14 - The articles of association set out in the First Schedule (called as “Model Articles") should apply in respect of any company (other than a company limited by guarantee), except to the extent that the company adopts articles which exclude, modify or are inconsistent with the model articles.

Effect of articles Sec 16 The articles of a company should bind the company and its share holders as if there is a contract between the s/hs and the co. Therefore, members can bring action against the co. for breach of contract Eg: Hickman v. Kent Wood v. Odessa Waterworks co.

Contd. . It is a contract between the co. and s/hs and between the s/hs. Therefore, the members can only bring action in the capacity of shareholder. Eg: Elley v. Positive Government Life Assurance Co.

STATUTORY CONTRACT Articles of Association Share holders agreements

Exception Sec 89. Notwithstanding anything to the contrary in the articles of the company, a shareholder should not be(a) bound by a resolution altering its articles ; or (b) required to acquire or hold more shares in the company, where that resolution or the holding of those shares would increase the liability of the shareholder to the company, (unless the shareholder agrees in writing to be bound by the resolution or to accept the shares, as the case may be. )

Effect of statement of objects Ashbury Railway Carriages and Iron Co. Ltd v. Hector Richie (14 -75) L. R. 7 H. L. 653 Jupiter Cigarrate Tobacco co. Ltd v. Soyza

Effect of statement of objects in Articles The companies no longer has to state their objects. If the co. wants it can set out the objectives Sec 17(1) If the Articles set out the objectives of the co. it should be deemed to be a restriction in carrying on any business or activity that is not within those objects (unless the articles expressly provide otherwise)

Contd… However, even if the Articles provide for such restrictions- According to Sec 17(2) – (a) the capacity and powers of the company should not be affected by such restrictions AND (b) an act of the company or a contract or other obligation entered into by the company and a transfer of property by or to the company, should NOT be invalid by reason only of the fact that it was done in contravention of such restriction.

Rational for the position To strike a balance between the interests of the co. members and 3 rd parties who deal with the co. Ensure that the co. does not suffer from any limitations upon its legal capacity Recognise that the objects clause is not a suitable vehicle for controlling commercial activities

Contd… Sec 17(3) Nothing in subsection (2) should affect – (a)the ability of a shareholder or director of the company to make an application to court under section 233 to restrain the company from acting in a manner inconsistent with a restriction placed by the articles (unless the company has entered into a contract or other binding obligation to do so) OR (b) the liability of a director of the company for acting in breach of the provisions of section 188. (Directors to comply with Act and company's articles)

Sec 17 (1), (2)and (3) Sec 17(3) does not mean that the objects clause or restrictions on corporate power has no effect. While a 3 rd party need not be disadvantaged when a co. breaches its own constitution ( Sec 17(2)) The possibility remains that persons within the company will. Further, section 185 – major transactions has to be considered. So, the doctrine of ultra vires is abolished by the companies Act No. 7 of 2007 in a very narrow sense that it does not affect corporate capacity. Therefore, Ultra vires is still operate internally, effectively confining the authority of officers.

The “Indoor Management Rule” Royal British Bank v Turquand(1856)