The constitution of the company, i.e. its memorandum and articles of association, govern the way in which these relationships operate and has been referred to as a contract between the members, i.e. the shareholders and the company itself. In this paper, concerns that had previously been raised in relation to section 14 of the Companies Act 1985 are discussed and considered in the context of the new arrangements brought in by section 33 of the Companies Act 2006. In order to discuss these issues, the position under section 14 will first be considered along with relevant case law, before moving on to consider section 33 and the way in which this changes the contractual relationships between the relevant entities.
Closed companies present particular difficulties in this regard, due to the fact that control of the company is held either by five or fewer people or where all shareholders are also directors. Although it is recognised that a director is different in terms of entity to a shareholder when the same people undertake both roles, it is simply not practical to deal with the contractual relationship between the company, the members and the directors. Throughout this paper, the focus is on the difficulties, both historically and currently, in relation to the contract between the shareholders and the company where the company is a closed company of the nature described above.
As noted by Professor Rajak1, 'T...
tion 14 is relatively clear, it is not always going to be practically obvious and this has been evident in the way that the court has handled issues of the contractual relationship laid out by the constitution, particularly in relation to closed companies.
In accordance with s14 of the 1985 Act, when a shareholder takes shares in the company, they are effectively entering into a contract with the company based on its articles and memorandum of association. This section suggests that the memorandum and articles should be treated as if it were a contract entered into between each individual shareholder and the company. It is regarded as a business document and as such it is thought to be a business document which must be treated by the courts as needing to have business efficacy.
This is not a new issue and case law dating back to the late 19th century has had to deal with the issue of interpreting the contractual impact of the articles on shareholders and third parties. For example, in Pritchard's case2, the articles stated that, upon incorporation, a contract would be entered into between the company and the vendor of a mine. The mine would be purchased partly through cash and partly through fully paid shares. The company went into liquidation shortly after the vendor signed the articles, meaning that there was no cash available; however, it was held in court that the articles could not be seen as a contract between the vendor and the company, but rather as a contract between the shareholders and the company in relation to their rights as shareholders and not in relation to their rights as third parties who are interested in the company's affairs.
One of the main difficulties cited in terms of the use of the wording in section 14 was the fact that the wording came