The The fundamental principle of company law is established

The Companies Act 2006 has governed the
articles of association in the United Kingdom altering the articles in a company’s
constitution. A critical analysis will be carried out in order to establish
whether outsider rights can be used by members of a company. This will be thoroughly
evaluated through the case of Hickman v Kent – a fundamental case in the development
throughout the law.

 

The fundamental
principle of company law is established through the Salomon principle, this
allows companies to become separate legal entities. As a separate legal entity,
companies will be able to employ people and enter into contracts. This was
reinforced by Lord Halsbury stating that ‘it is impossible to dispute that once
the company is legally incorporated, it must be treated like any other
independent person’1. As
they can employ people, they are now able to understand the rights they hold as
a company under the articles of association part of the constitution of the
company2.
The memorandum of association is a document that organises a company’s outer
activities, which must be written up in the manner of a registered company. This
forms the company’s constitution. Every company must obtain and register a set
of articles so that there is an understanding under the decisions that will be
made, so that there is a set structure to the inside activities within the
company. Before the Companies Act 2006, there was the memorandum of association
which was brought into consideration by the act to make things flexible in
regard to the running of the company being successful, affirmed by Blackburn J
in the case of Ashbury Railway Carriage and Iron Co Ltd v Riche mentioning that
‘the capacity of a company incorporated under the act of 1862 was limited to
the object in the memorandum of association’3.

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It is pivotal to
address the effect of the articles of association all together. Section 33
states that ‘The provisions of a company’s constitution bind the company and
its members to the same extent as if there were covenants on the part of the
company and of each member to observe those provisions.’4To
explain, this reiterates that any provisions that are within these articles will
make a binding contract, supported by the comments by Stirling J held that: ‘What
I have to determine is, whether that which is proposed to be done is in
accordance with the articles of association as they stand, and, in my judgment,
it is not, and therefore the Plaintiff is entitled to an injunction so far as
relates to the payment of dividends’5.
This causes a conflict due to the provisions giving rights to outsiders as this
should be respected under the companies act 2006.

 

Looking into the case
of Hickman v Kent6, the
decision outlines how the articles can only be used to enforce membership
rights, and cannot be used by non-members through the process of a two-stage
test. It was also held by Astbury J in this case that no article can constitute
a contract between a company and another person. This is because the articles
prevented Mr Hickman, he was bound under section 33 of the Companies Act 20067.
Firstly, this test is to establish whether the individual trying to enforce the
right is an insider or an outsider. When enforcing an insider right, these
include the right to: Attend a general meeting, vote at a general meeting, have
your vote recorded and the right to a dividend (if recorded).  If they are an insider the second element to
be proven is the right that they are trying to enforce. A person can’t enforce
an outsider right, therefore only an insider can enforce an insider right. As
an outsider, the rights they uphold involve the right to be a company solicitor,
this was evident in the case of Eley v Positive Government Security Life
Assurance Co8  which held that Eley could not rely on the
articles that involved the directors and shareholders. As an outsider, under the
privity of contract law a contract cannot confer rights or impose obligations
arising under it on any person except the parties9,
therefore Eley was an outsider.

 

In this central case of Hickman, it was concluded that you
must be an insider (shareholder) and you must exercise one of the rights that
an insider possesses so that you can obtain the right to hold a company in order
to respect the articles of association. This provides a solution however on
which clauses be respected. On the contrary, the case of Hickman provides
solutions and guidance to those that could be respected. Hickman goes against section
33 as it is restricting the scope from people holding a company accountable to
enforce principles in the articles of association. When focusing on the Salomon
principle however, the courts are very reluctant to do anything to jeopardise
the principle of companies. By restricting the scope of s.33, this upholds the
Salomon principle and stops outsiders from holding companies accountable, as
this gives companies full rights to make decisions. However, this coincides
with the principle within Foss v Harbottle, involving the exceptions for derivative
action, as once the shareholder makes the decision, the majority must follow as
spoken about within this case10. Hickman
v Kent also mirrors Foss v Harbottle as it also restricts outsiders interfering
within the company, which also upholds the Salomon principle.

 

There is a contrast
with the theory of the Hickman test and s.33 of the Companies Act. There is
confusion as to which law prevails over the other and It must be addressed
firstly that, there has been a lot uncertainty when it comes to the constitution
of s.33 as the effect of this clashes with the most profound case in company
law. It was mentioned in the case of Beattie v E and F Beattie by Lord Greene
that he was uncertain as to whether s.33 would be of controversy throughout the
times to come11. This
legislation fails to clarify whether the rights under s.33 are enforceable. To emphasise,
the case of Hickman, which the House of Lords tried to use to shift in the law
through the context of s.14 becoming redrafted into s.33. In the Hickman case, the
outsider was a member and a director, and it was not possible for him to enforce
his director rights stated in the articles because he was emphasising his claim
as a director and not as a member.

 

Lord Wedderburn attempted to clear up the issue within the
law involving the reformation of section 14 of the Companies Act and section
33. He spoke out against the Hickman test, affirming that shareholders can
enforce outsider rights under section 33 of the Companies Act if the party sues
as a shareholder. Lord Wedderburn strengthened his point by pointing towards
the case of Quinn & Axtens Ltd. v Salmon12,
wherein the House of Lords, a director of a company was to have an injunction
to get a transaction stopped in his company. He was able to enforce his rights
as an insider (shareholder) and convince everyone his rights as an outsider
should be enforced. From this decision, it is clear that there is a conflict as
you must uphold one of the required rights as an insider to be able to hold the
company. The views of Lord Wedderburn obstructs the way that a company will
function hence the conflict with s.33.

 

 

 

 

 

 

 As there has been a
debate on the law, which we are aware is not unflawed, it is reasonable to conclude that s.33 needs
some amendment to provide clarification as to what type of contract the company
constitution is and the scope of its contractual identity

 

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