KILO GROUP 7:

MEMBERS
Shayla Karsan G34/144556/2023 Kilo
Terry Kiiru G34/145073/2022 Kilo
Joe Onyango G34/145216/2022 Kilo
Nancy Mwende G34/143696/2021 Kilo
Lucy Gitonga G34/145359/2022 Kilo

LEGAL EFFECT OF ARTICLES OF ASSOCIATIONS

INTERPRETATION OF ARTICLES
Most of the rights and obligations of shareholders, members, board of directors, and
directors, as well as the operation of the company, are arranged by the legal company
framework in the form of a charter document called " articles of association.” The
regulatory document known as articles, contain minimal requirement that is determined
by regulatory bodies for companies to operate as distinct legal entities within their
jurisdiction .
The Articles of association gives detailed components which include the company’s
name, legal structure, capital structure, corporate governance, administration of corporate
records which goes hand in hand with the Memorandum of Association, which outlines
the company's goals and objectives. Moreover, the Articles of Association must comply
with the laws and regulations of the jurisdiction in which the company is incorporated.
They are generally binding on all members of the company, and any breach of the articles
can give rise to legal action. However, the articles can be amended with the consent of the
shareholders, provided that the amendment does not contravene any statutory provisions.
While the specific content of the Articles of Association can vary depending on
jurisdiction and company type, here are several common legal effects are ;
1.Legal Identity
A company needs a distinctive name in order to be recognized as a legal entity. It needs to
be included in the association's articles. They must be filed with the relevant authorities to
officially form the company.
2.Purpose of the Company
The articles of association must specify the organization's objective, regardless of the
pursuit. Non-profit organizations work to improve society by offering value that may be
intangible, whereas for-profit businesses seek to benefit their stakeholders by adding
value to society.
3.Corporate Governance
They act as the company's constitution, outlining the rules for governance, management,
and operation. This includes the roles and responsibilities of directors and officers,
procedures for meetings, and decision-making processes
4.Ensuring Compliance
 They ensure that the company operates within the legal framework set by the jurisdiction.
This includes compliance with corporate governance standards and other regulatory
requirements.
5.Regulating Shareholder Rights
A company may decide to create different types and classes of shares known as
alphabetical shares, in order to assign varying rights to several owners, which might be
required to represent the amount of capital invested in the business or for tax purposes.
The articles define the rights and obligations of shareholders including;
Issuance of shares
The articles should include any limitations or conditions on its distribution. If there are no
restrictions in the articles, companies incorporated under the Companies Act of 2006 and
having only one class of shares are immediately authorized to assign shares. A broad
permission might be included in the articles to grant authority to all other corporations to
distribute shares.
Pre-emption rights
Whereby shareholders have the right of refusal before new shares can be offered to third
parties.
Voting rights
Is to be weighted between the shareholders. It’s a fundamental aspect of corporate
governance, allowing shareholders to participate in the decision-making processes of a
company. This is highlighted in the case of Holmes v Keyes [1959]
The case involved a dispute over the interpretation of a company's articles of association.
Article 65 1provided that a resolution at a general meeting would be decided by a show of
hands unless a poll was demanded before or upon the declaration of the result. Issue arose
on whether a poll could be demanded before a show of hands if there was no show of
hands at all. The court held that a poll could indeed be demanded before a show of hands,
even if there was no show of hands. The court also emphasized that business documents,
such as articles of association, should be construed to give them reasonable business
efficacy. Moreover, the court reasoned that requiring a show of hands solely for the
purpose of demanding a poll would be an inconvenient and unnecessary formality. Its
decision clarified the interpretation of the articles and ensured that the company's
business operations could proceed efficiently without unnecessary formalities.
Dividend distribution
Procedure used by an organization to give its shareholders a percentage of its profits.
Although cash is normally used for this payout, other options include property or more
shares. It’s appropriated between the shareholders. As seen in the case of Thompson vs
Goblin Hill Hotels Ltd [2011]

1
https://swarb.co.uk/holmes-v-keyes-ca-1959/
 This is a case about how the cost of maintaining a villa complex in Jamaica should be
shared between shareholders and leaseholders whereby a company called Goblin Hill
Hotels Limited (GHHL) was incorporated to develop a vacation home complex in phases.
The development was structured to achieve approved hotel enterprise status for tax
benefits. Purchasers of shares in GHHL were required to sign agreements including an
option to purchase shares and enter into a lease of a villa unit. There was a distinction
between the Incentive Period (first 20 years) and the period after. The articles of
association in article 91(1) and clause 5(b) 2specified how assessments would be raised to
cover maintenance costs. However, the issue arose when the appellants (shareholders)
argued that assessments should be based on all issued shares. The respondent (GHHL)
however, argued that only shares held by leaseholders should be considered. A decision
was made and the Privy Council ruled that the plain and ordinary meaning of the articles
required all shareholders to contribute to the assessments, not just leaseholders. The Court
then rejected the argument that this interpretation was commercially absurd, as the
shareholders had entered into the agreements knowing their obligations. The Privy
Council allowed the appeal, meaning the Supreme Court's decision was upheld.

References

“Holmes v Keyes: CA 1959.” Swarb.Co.Uk, 18 June 2022, swarb.co.uk/holmes-v-

keyes-ca-1959/. https://swarb.co.uk/holmes-v-keyes-ca-1959/ [accessed 23.09.24]
Court, The Supreme. “JCPC.” John Thompson & Janet Thompson (Original
Appellants/Cross Respondents) v Goblin Hill Hotels Limited (Original
Respondents/Cross Appellants) - The Judicial Committee of the Privy Council,
www.jcpc.uk/cases/jcpc-2009-0076.html. Accessed 23 Sept. 2024.

2
https://www.jcpc.uk/cases/jcpc-2009-0076.html
ARTICLES AS CONTRACT
The concept of articles of association as a contract is fundamental in company law,
establishing a binding relationship between a company and its members.
Articles as Contract between Company and Members.

Articles are a statutory contract which binds the members to the company, and
also binds the company to the members, each may sue other to restrain imminent
breach- Hickman v Kent Sheep Breeders Association; Wood v Odessa
Waterworks
Co (1889) 42 Ch D 636; Pender v Lushington (1877); Salmon v Quin &
Axtens
(1909)

The articles of association serve as a statutory contract between a company and its
members, establishing the rights and obligations of both parties. This concept was
articulated by Mellish LJ in Re Tavarone Mining Co, Pritchard’s Case (1873), where
he emphasized that these articles create binding agreements that each party can
enforce.

In Bratton Seymour Service Co Ltd v Oxborough (1992), the court reinforced the idea
that articles bind the members to the company and vice versa, allowing members to
sue the company in cases of imminent breach.

Hickman v Kent Sheep Breeders Association (1915)

INTRODUCTION
This is a notable case that illustrates the contractual nature of a company’s articles of
association. This is a landmark case in company law that addresses the enforceability
of a company’s articles of association as a binding contract between the company and
its members. The case highlights the rights of members in relation to the governance
of the company and the legal implications of actions taken contrary to the articles.

Facts
The Kent Sheep Breeders Association, a company limited by guarantee, had specific
provisions in its articles governing the conduct of its members.
Hickman, a member of the Association, was suspended following a dispute regarding
his conduct.
The suspension was implemented without adhering to the procedural requirements
outlined in the articles, leading Hickman to challenge the legality of the suspension
Issues
Enforceability of Articles: The primary issue was whether the articles of association
constituted a binding contract that Hickman could enforce to contest his suspension.
Procedural Compliance: The case examined whether the procedures followed by the
Association were compliant with the articles, particularly concerning the right to a fair
hearing before suspension.

Analysis
Contractual Nature of Articles: The court affirmed that the articles of association act
as a statutory contract. This means that both the company and its members are legally
bound by its provisions. Members can enforce their rights under these articles.
Rights of Members: The ruling emphasized that members have a legitimate
expectation to have the procedures outlined in the articles followed. In Hickman's
case, the court found that his suspension was unlawful due to the lack of proper
procedural adherence.
Legal Precedent: The decision reinforced the principle that members can seek legal
remedies if the company fails to act according to its own rules, thereby upholding the
rule of law within corporate governance.
Implications for Corporate Governance: This case set a precedent for how
members can interact with the company and seek redress. It underscored the
importance of following established procedures to maintain fairness and
accountability in company operations.
Conclusion
Hickman v Kent Sheep Breeders Association is a pivotal case that clarifies the nature
of the articles of association as a contract and reinforces the rights of members in a
company. The court's ruling serves as an important reminder of the necessity for
compliance with procedural rules to ensure fair treatment of all members, contributing
to the overall integrity of corporate governance.

Articles cannot remove member’s statutory rights- Re Peveril Gold Mines Ltd
[1898] 1 Ch 122; Baring-Gould v Sharpington Combined Pick and Shovel
Syndicate, [1899] 2 Ch 80
INTRODUCTION
The principle that articles of association cannot remove a member’s statutory rights is
well-established in company law, illustrated by cases like Re Peveril Gold Mines Ltd
and Baring-Gould v Sharpington Combined Pick and Shovel Syndicate.

Re Peveril Gold Mines Ltd [1898] 1 Ch 122

Facts
The case involved the management of Peveril Gold Mines Ltd, where the articles
sought to limit members’ rights regarding the transfer of shares and voting. A member
challenged the validity of these restrictions.

Legal Principle
The court held that while companies can set their own articles of association, they
cannot infringe upon the statutory rights granted to members by company law. The
articles must operate within the framework of existing legislation, and any provisions
that attempt to strip members of their statutory rights are invalid.

Baring-Gould v Sharpington Combined Pick and Shovel Syndicate [1899] 2 Ch

80

Facts
In this case, the articles of the syndicate included clauses that restricted the rights of
members to vote and participate in meetings. A member contested these restrictions as
unlawful.

Legal Principle
The court reaffirmed that articles of association cannot validly eliminate or diminish
statutory rights. Members retain certain rights, such as the right to vote and to receive
information about company affairs, which cannot be overridden by the articles.

Analysis
Protection of Statutory rights: Both cases emphasize the protective nature of
statutory rights afforded to members under company law. The courts maintain that
these rights are fundamental and cannot be abrogated by contractual agreements
within the articles.
Limits of Articles: The rulings clarify the limits of what can be included in the
articles of association. While companies have flexibility in their governance
structures, they must respect the rights established by legislation.
Implications for governance: These cases reinforce the principle of fairness in
corporate governance, ensuring that members cannot be unduly restricted by internal
rules that contradict statutory provisions.
Conclusion
The cases of Re Peveril Gold Mines Ltd and Baring-Gould v Sharpington Combined
Pick and Shovel Syndicate serve as significant reminders that while articles of
association govern a company's internal affairs, they cannot infringe upon the
statutory rights of members. This principle is crucial in maintaining the integrity and
fairness of corporate governance.

Articles only apply to members in capacity as members- Globalink

Telecommunications Ltd v Wilmbury Ltd (2003) 1 BCLC 145; Beattie v E and F
Beattie Ltd [1938] Ch 708, Eley v Positive Government Security Life Assurance
Co Ltd (1876) 1 Ex D 88; Browne v La Trinidad (1887)37 Ch. D 1

INTRODUCTION
The principle that articles of association only apply to members in their capacity as
members is a fundamental aspect of corporate law, as illustrated by various cases,
including Globalink Telecommunications Ltd v Wilmbury Ltd, Beattie v E and F
Beattie Ltd, Eley v Positive Government Security Life Assurance Co Ltd, and Browne
v La Trinidad.

Globalink Telecommunications Ltd v Wilmbury Ltd (2003) 1 BCLC 145

Facts
In this case, a dispute arose between shareholders regarding the enforcement of
provisions within the articles.
The court examined whether the articles could apply to the actions of individuals who
were not acting in their capacity as members.

Legal Principle:
The court confirmed that the articles of association regulate the relationship between
the company and its members solely in their capacity as members. Actions taken by
individuals outside this capacity are not governed by the articles.

Beattie v E and F Beattie Ltd [1938] Ch 708

Facts
In this case, a shareholder sought to rely on provisions in the articles concerning
disputes between shareholders. The issue was whether the articles could govern
disputes involving a shareholder acting in a different capacity.

Legal Principle
The court ruled that the articles apply only to members when they are acting as such.
Any rights or duties arising under the articles are confined to the context of
membership, excluding other roles.

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88

Facts
Eley, a member and solicitor for the company, attempted to enforce rights under the
articles relating to his professional capacity.
The question arose whether he could invoke the articles in this context.

Legal Principle
The court held that Eley could not enforce rights under the articles because they only
govern members in their capacity as members. His role as a solicitor did not afford
him the protections or rights granted by the articles.

Browne v La Trinidad (1887) 37 Ch D 1

Facts
This case involved disputes between shareholders and the management of the
company.
The focus was on whether certain actions could be challenged based on the articles.

Legal Principle
The court concluded that the articles apply strictly to the relationships and
transactions involving members as members. Actions taken outside this context could
not be challenged under the articles.

Analysis
Scope of Articles: The rulings emphasize that the articles of association are limited to
regulating the relationship among members in their capacity as members. Any claims
or disputes must arise from actions taken within this framework.
Member v non-member roles: These cases delineate the boundary between the roles
individuals may hold (e.g., member, officer, director) and clarify that articles cannot
be invoked to address issues outside membership.
Corporate governance: This principle fosters clarity in corporate governance, ensuring
that the rights and obligations outlined in the articles are strictly adhered to in the
context of membership, preventing confusion from overlapping roles.

Conclusion
The cases of Globalink Telecommunications Ltd v Wilmbury Ltd, Beattie v E and
F Beattie Ltd, Eley v Positive Government Security Life Assurance Co Ltd, and
Browne v La Trinidad collectively reinforce the principle that articles of association
apply solely to members in their capacity as members. This distinction is crucial for
maintaining clarity in the governance and legal relationships within a company.

Articles as Contract between Members interse- conflicting decisions

Articles not enforceable contract inter-se- Salmon v Quin & Axtens Ltd
(1909) AC
442.
INTRODUCTION
The concept of articles of association as a contract between members inter se (among
themselves) has been subject to conflicting interpretations in various cases. One
significant case is Salmon v Quin & Axtens Ltd (1909), which illustrates the
complexities in understanding the enforceability of articles as contracts among
members.
Salmon v Quin & Axtens Ltd (1909) AC 442
Facts
The case involved a dispute between members of a company regarding their rights
under the articles of association.
A member sought to enforce certain provisions in the articles against other members,
claiming a breach of the contractual obligations outlined in the articles.

Legal Principle
The House of Lords held that the articles of association do not constitute an
enforceable contract between members inter se. Instead, they serve primarily as a
governing document for the company and its relations with its members, rather than
directly creating enforceable rights among members themselves.

Analysis Of Conflicting Decisions

Enforceability among members: Salmon v Quin & Axtens emphasizes that while
articles govern the relationship between the company and its members, they do not
create a direct contractual relationship among members. This means that one member
cannot enforce the articles against another member based solely on the articles.
Contrast with other cases: In some cases, such as Hickman v Kent Sheep Breeders
Association, the courts have allowed members to rely on the articles to assert their
rights against other members. This suggests that there can be circumstances under
which articles may be treated as having a binding effect on members inter se.
Implications for members: The ruling in Salmon v Quin & Axtens underscores the
limitations on members' ability to enforce rights derived from the articles against each
other. Members may have rights against the company based on the articles, but these
rights do not extend to claims between members.
Corporate governance context: This distinction is significant in corporate governance,
as it highlights the framework within which members can operate. It raises questions
about the ability of members to hold each other accountable based on the articles,
leading to potential conflicts and uncertainties.

Conclusion
Salmon v Quin & Axtens Ltd serves as a key case in understanding the role of
articles of association as a contract. It clarifies that while articles govern the
relationship between a company and its members, they do not create enforceable
contracts among members inter se. This principle, alongside conflicting decisions
from other cases, underscores the complexity of interpreting the articles' role in
corporate governance and member relations.
Articles are enforceable contract inter-se- Rayfield v Hands [1960] Ch 1; Wood v
Odessa Waterworks Company [1880] 42 Ch. 636.

INTRODUCTION
The enforceability of articles of association as a contract between members (inter se)
is an important principle in company law. Articles of association form a key part of a
company's constitution, governing the relationship between the company, its
shareholders, and directors. In cases such as Rayfield v Hands (1960) and Wood v
Odessa Waterworks Co. (1889), courts recognized that under certain conditions, the
articles may create enforceable rights and obligations between the members
themselves. These decisions contrast with other judgments where the articles were not
considered an enforceable contract directly between shareholders.

Rayfield v Hands [1960] Ch 1

Facts
The company in this case was structured with both shareholders and directors, with
the articles of association containing a clause related to the transfer of shares.
Mr. Rayfield, a shareholder, sought to sell his shares. The articles of association stated
that if a member intended to sell shares, the directors had an obligation to purchase
them at a fair price.
Mr. Rayfield requested the directors to buy his shares, but they refused, prompting
legal action.
Issues
Do the articles of association create an enforceable contract between Mr. Rayfield (a
shareholder) and the directors?
Can the directors be compelled to purchase the shares under the terms of the articles?
Analysis
The court, in this case, held that the articles of association formed a binding contract
between the shareholders and the directors, despite the general rule that articles form a
contract only between the shareholders and the company. It was recognized that when
the articles impose specific obligations, like the directors being required to buy shares,
they create an enforceable contractual obligation. The court concluded that the
directors were indeed bound by the articles to purchase the shares, showing that the
articles can create direct obligations between shareholders and directors or members.
Conclusion
The cases of Rayfield v Hands and Wood v Odessa Waterworks Co. demonstrate that,
under certain circumstances, the articles of association can create enforceable rights
and obligations between shareholders, directors, and the company itself. While the
general rule is that articles primarily govern the relationship between the company
and its members, these cases illustrate that specific provisions within the articles can
create binding, enforceable duties between members, shareholders, and directors.
In Rayfield v Hands, the court recognized that directors could be contractually bound
by the articles to purchase shares, showing that articles can be enforceable between
shareholders and directors. Similarly, Wood v Odessa Waterworks Co. established that
shareholders could enforce the company's articles to ensure compliance with dividend
provisions.
These cases affirm that articles of association are not merely internal guidelines but
can function as enforceable contracts when specific obligations are involved,
empowering shareholders to protect their rights directly against other members or
directors.

Outsiders cannot sue to enforce rights in the articles- rights that have nothing to
do with the membership of the company- Eley v Positive Government Security
Life Assurance Co (1876) 1 Ex D 20; Salmon v Quin & Axtens Ltd [1909] 1
Ch 311; Globalink Telecommunications Ltd v Wilmbury Ltd [2003] 1 BCLC 145

INTRODUCTION
In company law, the articles of association form a contract between the company and
its members (shareholders), governing the internal management of the company.
However, outsiders (non-members) are not parties to this contract and generally
cannot enforce rights contained in the articles of association. This principle is
highlighted in cases such as Eley v Positive Government Security Life Assurance Co.
(1876), Salmon v Quin & Axtens Ltd (1909), and Globalink Telecommunications Ltd v
Wilmbury Ltd (2003). These cases demonstrate that rights in the articles that do not
relate to membership of the company cannot be enforced by non-members or those
acting outside their role as shareholders.

Eley v Positive Government Security Life Assurance Co. (1876) 1 Ex D 20

Facts
Mr. Eley was a solicitor who was named in the company’s articles of association as
the company’s solicitor for life. He later became a shareholder in the company.
When the company stopped employing his services as a solicitor, Mr. Eley attempted
to sue the company for breach of contract, claiming that his appointment as solicitor
was enforceable under the articles of association.

Issues
Can an outsider (in this case, a solicitor acting in a non-shareholder capacity) enforce
a right granted to him by the company’s articles of association?
Analysis
The court ruled that the articles of association create a contract only between the
company and its members (shareholders). The articles do not confer enforceable
rights on outsiders who are not acting in their capacity as members of the company.
Since Mr. Eley was acting in his capacity as a solicitor, not as a shareholder, he could
not enforce the articles. His appointment as solicitor was not a contract that arose
from his membership in the company.

Conclusion
This case establishes that outsiders, or even shareholders acting outside their role as
members, cannot sue to enforce rights contained in the company’s articles of
association. The articles of association form a contract between the company and its
members, regulating internal governance and member relations. However, they do not
create enforceable rights for non-members (outsiders) or even shareholders acting in a
capacity unrelated to their membership status. As demonstrated in Eley v Positive
Government Security Life Assurance Co., Salmon v Quin & Axtens Ltd, and Globalink
Telecommunications Ltd v Wilmbury Ltd, the enforceability of rights under the articles
is strictly limited to those acting as members of the company.

Case: Salmon v Quin & Axtens Ltd [1909] 1 Ch 311

Facts
Salmon, a director and shareholder of the company, sought to prevent the company
from passing certain resolutions by invoking provisions in the company’s articles of
association, which required unanimous consent for certain decisions.
Some resolutions were passed without his approval, and he attempted to enforce the
provisions in the articles to block these resolutions.

Issues
Does the enforcement of articles extend to shareholders acting in their capacity as
members or outsiders?

Analysis
While this case involved a shareholder (Salmon), the issue revolved around whether
the articles could be enforced between individual members of the company. The
articles were considered to govern internal company matters, not to create direct
contractual obligations between individual shareholders and the directors.
The court reaffirmed the principle that the articles of association form a contract
between the company and its members, but not between individual members or
between members and outsiders.

Conclusion
The decision confirmed that the articles of association cannot be enforced by outsiders
or non-members, and even shareholders must act within their capacity as members to
enforce provisions. The articles serve as a contract between the company and its
members, but they do not extend rights or obligations to external parties. Shareholders
seeking to enforce the articles must do so only in their capacity as members, and not
in any other role. This principle is reinforced by cases such as Eley v Positive
Government Security Life Assurance Co., Salmon v Quin & Axtens Ltd, and Globalink
Telecommunications Ltd v Wilmbury Ltd, which consistently emphasize the internal
focus of the articles and the limitation on who can enforce their provisions.

Globalink Telecommunications Ltd v Wilmbury Ltd [2003] 1 BCLC 145

Facts
In this case, Globalink Telecommunications Ltd was involved in a dispute with
Wilmbury Ltd regarding certain rights related to the company’s articles of association.
One party sought to enforce provisions in the articles that did not relate to
membership of the company but to contractual claims outside the scope of the articles.

Issues
Can parties acting outside their role as shareholders enforce provisions in the articles
of association?

Analysis
The court held that articles of association cannot confer enforceable rights on persons
or entities acting in a capacity unrelated to their membership in the company.
The articles regulate internal company matters and create contractual obligations
between the company and its members but do not give outsiders or parties acting
outside their role as members the ability to enforce right

Conclusion
This case reinforces the principle that articles of association are not enforceable by
non-members or parties acting in an external capacity, even if the articles contain
provisions that refer to them. The articles create binding obligations only between the
company and its shareholders in their capacity as members, and not with external
parties or shareholders acting in roles outside of their membership. As seen in cases
like Eley v Positive Government Security Life Assurance Co., Salmon v Quin &
Axtens Ltd, and Globalink Telecommunications Ltd v Wilmbury Ltd, any attempt by
non-members or outsiders to enforce rights or obligations through the articles will
fail, as these documents are strictly for internal corporate governance and member
relations.

ARTICLES AS IMPLIED TERMS OF CONTRACTS.

When incorporated into the contracts, articles can play the role of the core terms
which are aimed to determine the parties’ relationship. They can describe basic
concepts, responsibilities, and requirements that regulate the party’s behaviour in the
process of contract implementation. Quite often, an article of a contract may be
regarded as ‘implied’ in the contract as a term. This is the case where the articles
included form part and parcel of the intention of the parties entering into the contract
or the rationale behind their bargain.
The Doctrine of Implied Terms
The Doctrine of implied terms is a legal construct that permits courts to close gaps in
agreements made between parties when crucial considerations have not been
explicitly outlined. Understood as part of the agreement are implied terms, which are
not overtly defined but are comprehended based on a range of factors, including the
type of contract, the parties' goals, industry practices, or legal requirements.
Types of Implied Terms
There are two primary types of implied terms:
Implied terms in fact: These terms are suggested in view of the explicit details of the
contract, the parties' intentions, and the context in which it exists. They are commonly
derived from the manner in which parties behave, their discussions, or the
characteristics of the agreement. For instance, in a contract concerning the sale of
goods, even without being explicitly stated, an implied term is that the goods should
comply with merchantable quality standards.
Implied terms in law: Even if the details of the contract differ, these terms are
assumed by the law. They are frequently drawn from provisions of statute or common
law regulations. For instance, the legal system frequently includes the implied term of
good faith and fair dealing, obligating the parties to behave honestly and reasonably in
their dealings with each other.
Articles as Implied Terms
 Articles can be incorporated into contracts in various ways, such as by reference,
attachment, and incorporation by implication. When articles are incorporated into a
contract, they can become implied terms if they meet a certain criterion:
Relevancy: The articles are required to relate to what is covered in the contract. They
ought to tackle issues that are central to the agreement of the parties and should stay
away from unimportant or secondary subjects.
Necessity: These pieces must be important for the contract to work effectively. These
gaps should be filled by the agreement or it should feature important terms that the
parties have neglected to address.
Consistency: The articles need to be consistent with the express terms of the contract
and should not in any way contradict or weaken them.
Custom and Usage: If the documentation is typical of the particular trade or industry,
it may be seen as a part of the contract based on the expected knowledge and approval
of these practices among the parties.
Statutory Requirements: When the articles are required by law, they will become part
of the contract automatically, as a standard.
Examples of Articles as Implied Terms
Standard terms of business: Under conditions where the parties engage with each
other on standard terms of business, the terms of those standard forms may implicitly
become part of the contract, regardless of whether they are explicitly acknowledged.
Industry customs: If the contract relates to a tangible industry or profession, terms
standard to that industry may be assumed within the agreement, depending on the
presumed awareness and acceptance of such customs by the parties.
Implied warranty of fitness for purpose: An implied warranty of fitness for purpose
may emerge in agreements involving the sale of goods when the buyer informs the
seller of a particular purpose for which the goods are intended to be used, and the
seller recognizes or should recognize that purpose.
Implied term of good faith and fair dealing: For this term, the agreement stipulates
that all parties have to act truthfully and reasonably toward one another. It can be
integrated into many different contracts, including employment contracts, partnership
agreements, and franchise agreements.

Muirhead v Forth and North Sea Steamboat Mutual Insurance Association

(1894). 3
The mutual steamboat insurance company passed a special resolution requiring
insured vessels to keep one-fifth of their value uninsured. The resolution was
approved on the same day it was passed, contrary to the Companies Act 1862. A
shipowner insured a vessel with the company for £1000, with a declared value of
£3750. The policy included the articles of association as part of its terms and
conditions. The same vessel was insured with another company for £3000. The Court

3
‘Muirhead v Forth and North Sea Steamboat Mutual Insurance Association’ (vLex2024)
<https://vlex.co.uk/vid/muirhead-v-forth-and-805677689> accessed 23 September 2024.
 held that the revised articles were "common purposes" within the meaning of the law.
The claim that the ship was insured below its full value did not exempt the insurer
from the obligation to leave one-fifth uninsured. The Court found that the insurance
company had been acting as a trustee for five years. Therefore, the insured shipowner
had no claim under the law.
This case emphasizes the importance of compliance with business and insurance
policies. It supports the principle that policy holders are bound by the terms and
conditions agreed in the insurance contract, even if some terms seem weak.
Re New British Iron Co, ex parte Beckwith (1898)4
The company passed a special resolution supporting the voluntary liquidation, and
decided that the voluntary liquidation would continue under the supervision of the
court. At the beginning of the liquidation, the company directors shall be paid the
management fee, and at the time of liquidation, they claim to be ordinary creditors in
respect of these funds, despite the provisions of section 38 of the Companies act,
1862. It also states that the board of directors' remuneration is "10,001 yuan per year,
paid from the company's funds." The court held that Claimant could not enforce
articles in his capacity as director. However, a separate contract could be implied upon
same terms in article.
The Effect of Articles on Pre-Incorporation Contracts
A pre-incorporation contract is defined as an agreement made by individuals or
entities as representatives of an organization that is still in the formation process.
These contracts are important in the process of establishing a new business but also
come with unique legal difficulties. The articles of association of a business determine
the validity and enforceability of contracts made before the company is officially
formed.
Key Roles of Articles of Association
Authorization.
Express Authorization: The article, if clearly allowing the company to confirm or
adopt pre-incorporation contracts, grants it the power to do so upon formation. This
ensures a direct legal standing for the contract.
Implied Authorization: In certain jurisdictions, the articles may be considered to have
the power to ratify pre-incorporation contracts, even if there is no explicit mention of
that power. This is usually when the contract is required for the formation or operation
of the company.
Limitation of Liability.
Personal Liability: The issue of personal liability for obligations under contracts
formed before the company's incorporation might arise due to a lack of express or
implied authorization.
Corporate Liability: If the company opts to ratify the contract, it may incur
obligations itself, thus releasing the individuals from personal responsibility. It is
4
‘In Re New British Iron Company 1898 1 Ch 324 It Was Held That the Article Is Not’ (Coursehero.com2017)
<https://www.coursehero.com/file/p1crrb6/In-Re-New-British-Iron-Company-1898-1-Ch-324-It-was-held-that-
the-article-is-not/> accessed 23 September 2024.
 possible that the articles may put provisions in place that either reduce or do away
with the personal liability of people who enter into contracts before a company is
incorporated.
Ratification.
Procedural Requirements: The articles could detail the steps that must be completed
by the company to ratify a pre-incorporation contract. A resolution of the board of
directors or shareholders could be included in these procedures.
Time Limits: Articles can also set time restraints within which the company must
approve the contract. If the contract ratification by the company is not completed
within the allotted time, it may be interpreted as a rejection.
Legal implications.
Jurisdictional Differences: The legislation overseeing pre-incorporation contracts and
the role of articles of association can vary substantially among jurisdictions.
Third-Party Rights: The articles of association can influence the relationship between
the corporation and its shareholders, and they may also have effects on the rights of
those who agree to contracts before the incorporation. If a separate party leans on the
company's ratification of the document, their rights might be protected, even if the
company later tries to dispute the contract.
Corporate Governance: Articles of association can be significant in managing good
corporate governance when it comes to contracts made before incorporation.
Establishing distinct and transparent procedures for ratification and liability may
assist in mitigating disagreements and guarding the interests of everyone.
Browne v La Trinidad (1887).5
In this scenario, Mr. Browne serve as the plaintiff with a binding agreement to mine
gold in Venezuela together with the defendant, La Trinidad. The contract detailed that
Mr. Browne was to receive a specified portion of the mining operation’s profits. In
contrast, the Venezuelan government took charge of the mine, meaning there were no
profits made. As a result, Mr. Browne filed a suit against La Trinidad for his share of
the profits. The court found that La Trinidad was not obliged to compensate Mr.
Browne for his share of the profits, because the contract had an implied condition that
the mining operation ought to yield profits. Because the mine was seized and no
income was generated, this condition was not satisfied.
The main lesson we can draw from this case is the importance of the concept of
implied terms in a contract. These are expressions that, while not stated overtly in the
contract, are deemed to be part of the agreement. For that particular instance, the
implied term was that the mining operation should generate profits.
Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883).6

5
‘332 Browne v La Trinidad 1887 37 Ch D 1 Key Facts B Was a Shareholder of La’ (Coursehero.com2017)
<https://www.coursehero.com/file/p6cupkq/332-Browne-v-La-Trinidad-1887-37-Ch-D-1-Key-Facts-B-was-a-
shareholder-of-La/> accessed 23 September 2024.
6
Subodh Asthana, ‘Directors in Company Law’ (iPleaders18 December 2023)
<https://blog.ipleaders.in/director-companies-act-2013/> accessed 23 September 2024.
According to the Articles of Association for the Imperial Hydropathic Hotel Co
(presently known as The Imperial Hotel Blackpool), the directors were to hold their
positions for three years and complete their duties by rotation. The shareholders
agreed at a general meeting to dismiss two directors who had not yet reached the
normal retirement age and instead elected two others in their place. The business
stated that the directors had been duly eliminated. The Court of Appeal concluded that
the articles of the company could not be ignored through a shareholder resolution. The
general meeting's authority may not be disregarded, even with a majority that's big
enough to change the articles, if a company's articles limit that authority; it is essential
to first make formal amendments to the articles. The first judgment was given by Lord
Jessel MR.
Provisions in Articles Automatically Amending Terms of Appointment of
Company
The Companies Act, 2015 provides the Kenya legal framework for the formation,
operation, and winding up of companies. In this framework, the various articles of
association (articles) of a company serve an important function in outlining its internal
governance and operations. A point that could be explored in the articles relates to the
terms for appointing company officers.
Provisions for Automatic Amendment.
This Act does not directly necessitate the inclusion of clauses in the articles of
companies that automatically alter the terms of appointments for officers.
Nevertheless, businesses are allowed to include such terms should they feel
appropriate for the given conditions.
The common provisions and their legal foundation.
Termination Upon Change of Control.
Legal Basis: While the Act does not directly address this concept, it can be drawn
from the broader concepts of corporate governance and the idea of a "change of
control."
Impact: When a company experiences a major change in ownership or control, such
as a merger, acquisition, or a significant shift in shareholding, the terms of
appointment of specific officers may end automatically.
Expiry Upon Specified Date.
Including this provision can be a part of the contractual relationship between the
enterprise and the official. The officer's appointment is set to terminate on the given
date, except for situations involving renewal or extension.

Termination Upon Breach of Duty.

The Act requires company officers to complete a variety of responsibilities, including
acting in good faith and for the betterment of the company. An officer’s breach of
these duties can result in an automatic termination of their appointment according to
 these articles. Failure to fulfil duties can lead to punitive measures such as losing
one's job.
Incorporating this measure as a term in the contract between the company and the
officer is possible. If a certain event takes place, such as the accomplishment of a
project or reaching specified financial targets, the officer's appointment can be
terminated.
The 2015 Companies Act7 does not oblige companies to implement automatic
amendment clauses in their articles of association, but they may include them to
strengthen their corporate governance and ensure consistency between their officers'
appointment terms and their strategic ambitions.
Re Anglo-Austrian Printing and Publishing Union (Isaacs Case) (1892).8
An official receiver was designated to take charges against the former directors of the
Anglo-Austrian Printing & Publishing Union for misconduct, along with other funds.
It secured £7000 in damages for misfeasance and also £1200 in payments for unpaid
shares from its former shareholders. A set of debenture holders, however, had still not
been compensated. They challenged that the recovered money belonged to them, since
it was sent to the company where their charges were established and could not be
allocated to unsecured creditors until the debentures were settled. The discussion
concluded that as the claims were vested in the organization before it fell into
liquidation, the proceeds of that claim were subject to a floating charge, where the
floating charge specified that it encompasses any post-acquired property.
Amending the Articles.
At any moment, the articles of association for a company may be changed by a special
resolution, which requires a majority of at least three-fourths of the shareholder votes
at a general meeting. This ability to adjust permits companies to tailor their internal
governance and operations to shifting conditions.
Notably, any changes made to the articles are not retroactive. This implies that edits
made cannot affect current rights, duties, or completed transactions with retroactive
implications. To give an instance, if an organization revises its articles to adjust the
quorum standards for general meetings, this new standard will disregard meetings that
have occurred prior.
The principle is a must for sustaining stable and predictable relationships within
contracts. The purpose of establishing these articles is to allow parties to depend on
the terms that were in effect at the time of their agreement.
Swabey v Port Darwin Gold Mining Co (1889).
Director of the Port Darwin Gold Mining Company was Mr. Swabey. Director's
remuneration was not covered in the articles of association by the company. Without
any explicit terms, Mr. Swabey still assumed he would get payment for his role as a
director. Mr. Swabey chose to sue the company when it would not pay him. In its

7
‘THE COMPANIES ACT’ <https://brs.go.ke/wp-content/uploads/2023/03/CompaniesAct17of2015.pdf>.
8
‘Annotated Guide to the Insolvency Legislation Volume 2.’ (Google Books2014)
<https://books.google.co.ke/books?id=BjeqKydU-iwC&q=re+anglo-
austrian+printing+and+publishing&pg=PA206&redir_esc=y#v=snippet&q=re%20anglo-austrian%20printing
%20and%20publishing&f=false> accessed 23 September 2024.
 verdict, the High Court ruled that, although not specified in the articles of association,
director's remuneration was an implied term of the arrangement between Mr. Swabey
and the company. The court believed that a reasonable expectation existed for a
director to receive payment for their services, based on the inherent nature of the
position and the involved responsibilities. The Court of Appeal confirmed the High
Court's judgment, revealing that a term regarding director's remuneration can be
presumed based on the kind of relationship the director has with the business,
irrespective of explicit articles of association.
A third party cannot prevent alteration of the articles.
Though a third party is generally unable to stop alterations to a company’s articles of
association, these alterations can severely impact their rights and interests. Even if the
rights of others are at play, a special resolution allows shareholders to change the
articles. The alterations can have an effect on contractual bonds, security interests, and
statutory rights. If an adjustment results in a breach of contract or unfair prejudice, the
company may have to pay damages. It is wise for businesses to deliver notice and a
consultative opportunity to third parties affected by changes, to conduct themselves in
good faith, and to obtain legal advice prior to making substantial alterations to their
articles.

Southern Foundries (1926) Ltd v Shirlaw (1940).

this represents a prestigious English contract law case that established a principle
referred to as the implied term of good faith and fair dealing within contracts. This
case has made a major difference in contract law and has been mentioned in a variety
of subsequent cases. the defendant, Shirlaw, became managing director of Southern
Foundries (1926) Ltd. His agreement laid out that he would maintain the role for five
years, provided that the company remained intact or the shareholders did not vote for
his removal. A new enterprise, Northern Foundries Ltd, came into being during
Shirlaw's time. Subsequently, Southern Foundries combined with Northern Foundries.
After completing the merger, Shirlaw's assistance was unwanted, and he was let go.
According to the company, his dismissal was enforceable according to the clauses in
his contract. The judgment was that the company had acted in bad faith by dismissing
Shirlaw without giving him a reasonable opportunity to find another job. In essence,
the court suggested, that the contract contained a commitment from the company that
it wouldn't dismiss Shirlaw in any manner regarded as unfair or unreasonable.
Ultimately, the court ruled that the company held the legal right to let go of Shirlaw
under the provisions of his contract, but did not exercise that right in a reasonable and
fair way. This determination set the foundation for the implied term of good faith and
fair dealing within contracts.

RESTRICTIONS ON POWER TO ALTER ARTICLES

Pursuant to Section 22 of the Companies Act, a company may amend its articles of
association through a special resolution. Upon amendment l, the company is mandated to
lodge a copy of the amended articles with the Registrar.
Failure to lodge the amended articles is an offense and the company shall be liable to a fine of
up to two hundred thousand shillings and each day on which the failure subsists will warrant
a fine of up to twenty thousand shillings on each officer of the company.9

However, a company has the discretion of amending its articles there are certain limitations
that will be buttressed herein.

Alteration can only occur through consent of the shareholders or members in a special
resolution.

Russell v North Bank Development Corporation Ltd (1992). 10

Facts

The board of the company passed a resolution to issue new shares without unanimous consent
for the shareholders contrary to the shareholders agreement which the company was part of.
An injunction was sought by the shareholder, Russell, to prevent the company from issuing
new shares.
On appeal to the House of Lords, Russell altered his appeal to seek a declaration of the
validity of the provision rather than an injunction.

Issue

The company statutory authority gives it immense powers to alter its objects and articles or
shareholdings.
The general rule is that a company cannot contract out of its statutory powers conferred by
its articles.
A company and all its shareholders enter into a shareholder’s agreement. A clause in the
agreement unequivocally provides that no further share capital shall be created without the
consent of the shareholders. Can one of the shareholders bring an injunction restraining his
co-shareholders from voting in favor of the resolution to increase share capital?

Rule

9
Companies Act cap 56 of 2015
10
Eilis Ferran. “The Decision of the House of Lords in Russell v. Northern Bank Development Corporation
Limited.” The Cambridge Law Journal, vol. 53, no. 2, 1994, pp. 343–66. JSTOR,
http://www.jstor.org/stable/4507949. Accessed 26 Sept. 2024.
The decision herein makes it clear that a distinction is to be drawn between a company's
promise to exercise statutory powers and the promise by shareholders on how they will vote.
It is well established by numerous authorities that a vote attached to a share is a property right
and is exercised as the owner deems fit.
The decision in Russell underscores the overarching concept that the freedom to consent in
respect to voting rights is not constrained.

Analysis

The statutory powers of a company to alter its articles or to increase its share capital cannot
be overridden by an agreement to the contrary and any deliberation that purports to do so is
void.

Allen v Gold Reefs of West Africa (1990).11

The bona fide rule.

Facts

Gold Reefs articles gave it a paramount lien to hold any shares belonging to a member for
any debt owed to the company.
Mr. Zuccani held some partly paid-up shares. He also owned the only fully paid-up shares
issued by the company. He died insolvent.
The company altered the articles by a special resolution to create a lien on fully paid-up
shares deleting the word in brackets ( not only fully paid) held by such members).
Mr. Allen the executor of Zuccani sued to get the fully paid-up shares value.

Rule

The caveat here is that the alteration of articles is valid if it is bona fide, if done in good faith
to bolster the company's prospects.

Analysis
11
https://lawprof.co/company/company-constitution-cases/allen-v-gold-reefs-of-west-africa-1900-1-ch-656/
accessed 26/09/2024
The power to alter the articles must like all other powers be exercised according to general
principles of law and equity which are applicable to all powers conferred on majorities and
enabling them to bind minorities. It must be exercised only in the manner required by law but
also bona fide for the benefit of the company.

It was held that the shareholders were acting in the best interest of the company in exercising
the legal right to alter the articles of association so that the company could obtain payment of
the debt due by Mr. Zuccani.

The fact that Mr. Zuccani’s executors were the only persons practically affected at the time by
the alterations made in the articles elicited suspicion as to the bona fide of the company.

It was held that the directors could not be accused of having an ulterior motive or a vested
interest other than the company's best interest.

Analysis

The case established the principle that alteration of articles of a company would generally be
approved by a court as long as they were bona fide for the benefit of the company. This
principle served as a form of protecting minority shareholders before the development of
more specific unfair prejudice remedies by company law.

The same was reiterated in the case of Shutter Worth v Cox Bros and Vo (1927) 1 Ch 54.

The court propounded that in applying the Allen principle the court shall not substitute its
judgment for what is in the best interest of the company by the shareholders opinion.
However, a court can void an alteration of the articles that no reasonable man could consider
for the benefit of the company.

Facts

Cox Bros and Co had appointed a board of directors for life, and had fixed this under its
articles. Then it proposes to amend its articles so the director would lose his position if the
other directors requested in writing for him to resign.
Mr. Shutter worth who was targeted by the changes brought a claim alleging that the
alteration of the articles was not bona fide for the benefit of the company.
Issue

Was the alteration valid? Was it bona fide to the benefit of the company?

Analysis

It was held that alteration of the articles was for the benefit of the company. The court had the
discretion to intervene if the alteration was oppressive or extravagant that no reasonable
person could consider it for the benefit of the company if the actions of the shareholders is
either incapable of being for the benefit of the company or is such that no reasonable person
could consider it for its benefit. In this the court might intervene.

The two limbs of the modern-day bona fide test:

a. Focusing on the objective assessment of whether the alteration is capable of being
considered for the benefit of the company.
b. The subjective limb was later established in the case of Greenhalgh v Adrene Cinemas

In Re Charterhouse Capital Ltd (2015) EWCA 536 the court extrapolated seven principles
from the case law on amending articles a company12:
1. The manner of exercising powers to amend is guided by the purpose of the power.

2. A power to amend will be valid if it is to the benefit of the company but it will not be
for the benefit of the company if no reasonable person would consider it to be such.

3. The view of shareholders that they acted bona fide is not impugned by the fact that
one or more shareholders was actually acting under some mistake or lack of
knowledge.

4. The fact that the amendment puts minority shareholders in jeopardy does not
invalidate the amendment if it was done in good faith in the interest of the company.

5. An amendment will be deemed valid even though it does not solely benefit the
company but it benefits the shareholders, provided it is not discriminatory to the
minority shareholders.

6. It is the obligation of the person dissenting and impugning the validity of the
amendments to tender credible reasons to incline the court to rule in his favor.

12
https://uollb.com/blogs/uol/re-charterhouse-capital-ltd-2015.
Any alteration in the articles cannot amount to ultra vires exercise of power by a company in
excess of what is contained in the memorandum of association.
In the event of any conflict between the memorandum and the articles of association, the
memorandum will prevail.

In Hutton v Scarborough Cliff Hotel, the company's memorandum expressly provided that
the capital of the company was divided into a certain number of shares. There were no
provisions in the memorandum indicating that the shares might be of different classes. A
special was passed in a general meeting whereby the articles were altered by inserting a
power to issue new shares with preferential dividends.

Rule

The court held that the alteration was inoperative as there was an implication in the
memorandum that all shareholders would stand on an equal footing as to the receipt of the
dividends and such an act amounted to the altering of the constitution of the company fixed
by the memorandum.

The alteration must not be inconsistent with the provisions of any other act or any other
statute.

In the Indian case if Madhara Ramachandra Kamath v Canara Banking Corporation, the
company contained a clause in its articles empowering it to expel a member if he unjustly or
unlawfully has recourse to law in any matter whatsoever connected with the company and on
such expulsion, he shall never again be admitted into the company.

Acting under such provisions, the company at a general meeting expelled the petitioner
herein. Subsequently to the passing of the resolution of expulsion, the company altered its
articles by making an addition to the aforesaid clause which allowed the company to force
expelled members to sell shares to any person at a price fixed under the provisions of the
articles of association l, and authorize the director to sign the necessary transfer instrument on
behalf of such transferor if he fails to do so.

The company, in light of this provision, authorized a director to register the transfer of the
shares of the petitioner without a valid instrument of transfer. Aggrieved by the same, the
petitioner approached the court which held that the provision contained in the articles was
against the Companies Act, 1956 of India.