Section 36 of the 1956 Act corresponds to section 10 of the 2013 Act and explains the effect of the memorandum and articles.They are very important documents and when they are registered they have the following impacts of :
- They bind the company and the members thereof to the same extend as if they respectively had been signed by the company and by each member.
- All deeds/covenants on its and his part must observe all the provisions of the memorandum and of the articles
- All money payable by any member to the company under the memorandum or articles shall be considered a debt due from him to the company
Section 36 of the Companies Act,1956
The effect of registration of memorandum and articles of the company and its s members,and the relationship of memorandum and articles is analysed below in the context of Indian and English cases.The Discussion below will provide guidance in interpreting section 10 of the 2013 Act which is phrased similarly as section 36 of the 1956 Act.
Relationship between MoA and AoA
As between the memorandum and articles ,the memorandum is the dominant instrument.it limits and restricts the company’s power to specified objects and to things incidental or conductive.It effectually controls the articles in the sense that anything in those inconsistent with any provisions in the memorandum is invalid.The memorandum is,as it were,the area beyond which the action of any company cannot go which denotes the inside area.
How far articles are a contract.
Binding upon members
The provisions of the memorandum are binding upon the company in reference to its members,and to the same extent as if they have signed a contract to be bounded by the articles.The legal analysis of the nature of an association of persons has always been in terms of a contract between the association and the associates.Even in the case of an unincorporated association the bond of union was regarded as contractual.The association are simply a contract as between the shareholders in respect of their rights as shareholders.They are deed of partnership by which the shareholders agree Articles of Association state the arrangement between the members.The articles of the company provided that in the event of a member’s bankruptcy his shares would be sold by the directors at a fair price not exceeding the par value.Statements and representation in a prospectus cannot be at variance with the provisions of the company’s memorandum and articles.The later will prevail over the former.Shares are applied for and purchased and membership is granted on the basis of the company’s memorandum .The prospectus cannot be used for changing the terms of the contract already settled between the members and the company through the memorandum and articles.
A company was created under a joint venture agreement between certain partners.One of the terms of the agreement was that the members of the company would not transfer their shares without the consent in writing of other members.This term of the agreement was not incorporated into the articles of association of the company.One member transferred his shares to the another member.the transfer was held to be valid.There was no restriction against it in the Company’s memorandum.A shareholder’s agreement which is incorporated in the company’s articles provided that on the termination of an executive director’s employment for whatever reasons,his shares would be transferred to the subscribers in accordance with the company’s articles.The employment was unlawfully terminated.The affected director contented that the clause in this article was not to apply to an unlawful termination.
A shareholder was also a tenant of the landlord management company.In his capacity as a tenant he does not pay any service charges by reason of which forfeiture proceedings were pending.But the parties enter into a compromise.The consent order provided that the specified sum could not be recovered from the tenant.The company then levied recovery for the amount by levying contribution on the shareholders under the specific provision in the articles of the company.The court said that the consent order settled the account between the parties as landlord and tenant.It did not affect the position of the parties in other respects.
Transfer of tenancy:
The agreement to handover the management of the tenant company as a going concern to others was held to be an unauthorized sub-letting.The Court found that the dominant motive in the transfer of management was to bring about transfer of tenancy.The fact that the original tenant company continued to exist in the same form was immaterial because ,on lifting the veil,it could be seen that the original form was maintained,as it was necessary only for the purpose of providing cover to real transaction ,namely transfer of tenancy.
Articles binding upon company
a member can enforce articles against the company.The directors proposed to pay dividend in kind by issuing the debentures.the articles provided for the payment of dividend.The court held that payment means payment in cash and therefore the company could be compelled to pay dividend in terms of the articles.A member in his capacity as a member can enforce rights given to him by the articles such as impeaching any irregular forfeiture or prevent the company by an injunction restraining it from contravening the articles insist upon the strict observance of the articles according to their construction.
Private agreement binding on company
Private agreements normally are not binding on the company unless they are made a part of the articles.Any dispute regarding such private agreements is to be agitated before the civil court.In normal Course,the company should be a party or its articles should reflect such a private agreement to bind the company.But even if they do not form a part of the memorandum and the company is not made a party,the company is bound by the terms of the agreement where the company has taken any benefit or has acted in terms of any such private agreement at least in relation to the company has acted upon or the benefits taken therefrom.
Articles how far binding between members
The contractual force given to these by the section is limited to matters arising out of the company relationship of the members as members and does not extent to matters outside the company relationship.The intention of the memorandum and articles is to fix the rights and the liabilities of the shareholder as such in the company and not to restrain him in his individual capacity.The established position is that those constitute a contract between each member and the company and there is no contract in terms between the individual members of a company but the articles do not,any the less ,in my opinion,regulate their rights .
Such rights can only be enforced by or against a member through the company or through the liquidator representing the company;But think that no member has,as between himself and another member ,any rights beyond that which the contract with the company gives.This view is not quite accepted in the decision of the Bombay court ,according to which the contractual application of the articles is not confined to the company relationship only but may extend to other dealings between members.
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