Section 10 of the Companies Act,2013 provides that the memorandum and articles, when registered, bind the company and its members to the same extent as if they have been signed by the company and by each member and contain covenants on its and his part to observe all the provisions of the memorandum and of the 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, in relation to articles, neither a company nor its members are bound to outsiders.
In the case of Irrigation Development Employees’ Association v. Government of Andhra Pradesh [2005] 55 SCL 459 (AP), it was held that the articles of association merely govern the internal management, business or administration of a company. They may be binding between the persons affected by them but they do not have the force of statute.
Binding on Company and its Directors
Merely because in articles of association, the board of directors is empowered to refer any claim or demand to arbitration, provisions of section 36 [now section 10] cannot be interpreted to mean that the
company or its directors shall be bound to incorporate a provision for arbitration in every agreement that the company executes. This was held in the case of Skypark Builders & Distributors v. Kerala Police Housing & Construction Corpn. Ltd. [2004] 50 SCL 254 (Ker.).
The legal effect of the memorandum and articles may be divided under the following heads:—
(a) Members bound to the company;
(b) Company bound to the members;
(c) Members bound to the members;
(d) Company and the outsiders.
Members Bound to the Company
Each member must observe the provisions of the articles and memorandum. For instance, a company has a right of lien on member’s shares, or to forfeit the shares on non-payment of calls. Every member is bound by whatever is contained in the memorandum and articles. In V.B. Rangaraj v. V.B. Gopalkrishnan [1992] 73 Comp. Cas. 201 (SC) it was held that the articles of association are the regulations of the company binding on the company and on its shareholders. Shareholders, therefore, cannot, among themselves, enter into an agreement that is contrary to or inconsistent with the articles of association of the company. In Hickman v. Kent Sheepbreeders’ Assn. [1915] 1 Ch. 881, the learned Judge observed that though the articles can neither constitute a contract between the company and an outsider nor give any individual member of the company special contractual right beyond those of the members generally, they, in fact, constitute a contract between the company and its members in respect of their ordinary rights as members.
Company Bound to the Members
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 obligation to him, such as to send the notice for the meetings, to allow him to cast his vote in the meeting. In World Phone India (P.) Ltd. v. WPI Group Inc., USA [2013] 32 taxmann.com 238 (Delhi), where respondent shareholder asserted affirmative vote in a board meeting in terms of Joint Venture Association (JVA) entered into between parties but Articles of Association had not been amended to incorporate affirmative vote provided to respondent, it was held that JVA was not binding on company and respondent could not insist on exercise of the affirmative vote. Normally, action for breach of articles against the company can be brought only by a majority of the members. Individual or minority members cannot bring such a suit
except when it is intended for enforcement of personal rights of members or to prevent the company from doing any ultra vires or illegal act, fraud, or acts of oppression and mismanagement.
Members Bound to the Members
The articles bind the members inter se, i.e., one to another as far as rights and duties arising out of the articles are concerned. After the articles are registered, they not only constitute a contract between the
association or company on the one hand and its constituent members on the other, but they also constitute a contract between the members inter se. Ramakrishna Industries (P.) Ltd. v. P.R. Ramakrishnan [1988] 64 Comp. Cas. 425 held that It is well settled that the articles of association will have a contractual force between the company and its members as also between members inter se in relation to their rights as such members. However, articles do not create an express contract among the members of the company. A member of a company has no right to bring a suit to enforce the articles
in his own name against any other member or members. It is the company alone that can sue the offender so as to protect the aggrieved member. It is in this way that the rights of members inter se are regulated. A shareholder may, however, sue in his own name to restrain another, or others from doing fraudulent or ultra vires act. In Jahangir R. Modi v. Shamji Ladha [1866- 67] 4 Bom. HCR [1855], the Bombay High Court held: “a shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that has (by them) been employed in a transaction that they have no authority to enter into, without making the company a party to the suit”.
Company and the Outsiders
The memorandum or articles do not confer any contractual rights upon outsiders against the company or its members, even though the name of the outsider is mentioned in the articles. An outsider (i.e., a non-member) cannot rely on articles of association for his action against the company.In Major-General Shanta Shamsher Jung Bahadur Rana v. Kamani Bros. (P.) Ltd. [1959] 20 Comp. Cas. 501 (Bom.) The articles of a company provided that the Board of directors could from time to time appoint anyone or more of them as managing director(s). Under the articles, a managing director can be removed in the same way as other directors of the company, namely, by a special resolution. ‘S’ was appointed on 24-6-1957 as managing director by a resolution of the Board. The contention of ‘S’ was that the special resolution not having being passed, he could not be removed. The question was whether ‘S’ who was not a shareholder could rely upon the articles. Held that the plaintiff was not entitled to place any reliance on the articles. It was observed that even between a member and the company the articles of association constitute a contract only in respect of his rights and liabilities as a shareholder, but not in respect of rights and liabilities which he has in a capacity other than that of a member. But as between the company and outsiders, i.e., persons who are not shareholders, the articles do not constitute a contract which that person can take advantage of. Thus, where a person is in a dual capacity, namely, an outsider as well as a member, articles shall constitute a contract between the company and the member but in his capacity as member-only.
