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, ‘The [s.14 Companies Act 1985] contract between the company and the shareholders gives rise to mutual rights and obligations, but these lie in favour of and against the shareholder in his capacity as a member of the company’. This suggests that, although the concept underlying section 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