Companies Act 2006 s.

7(1) states that "A company is formed under this Act by one or more
persons - (a)subscribing their names to a memorandum of association,and (b)complying
with the requirements of this Act as to registration"
1

The constitution of a company follows two key documents the Memorandum of association
and the Articles of association.Although the Memorandum is a very important part of the
constitution the Articles of association is much more important.
This is a complex document which dissimilar to the Memorandum it is an internal document
containing detailed rules regarding important aspects of the company's organization such as
the conduct of the company meetings,the powers and the role of the directors, the
company organization.
The articles that have significance in this question are the ones that speak about the rights
of the shareholders,the conduct of the directors and the relationship between the two.
These articles have the role to regulate the relationship between the shareholders and the
company and also to grant enforceable rights on members.Companies Act 2006, s.33(1)
shows that the articles are viewed as terms of a contract.Therefore when an individual
purchases a share a contract is created between him and the company,him becoming a
shareholder.In Hickman V. Kent or Romney Marsh Sheepbreeders
Association(1920)37TCR163(CA) it was held that the articles must be treated as a statutory
agreement between the members and the Association(RayfieldvHands[1960].
2

Bisgood V Henderson's Transvaal EstatesLtd [1908] Ch 743 case also shows the importance
of the articles by establishing their purpose.This being to protect and define the position of
any shareholder and not to bind him as an individual.
3

The insider and outsider concept is one of the main issues regarding the Article of
association and therefore it is imperative to portray the distinction between them.An insider
is mainly a shareholder,a member of the company(has a contract with the company).The
harder concept to define is the outsider.As a person you can be both a member of a
company and an outsider at the same time.An outsider is someone who is hired by the
company or is involved with any domain or area of the company but does not have a
contract with it.The sets of rights for both this classes are separate and they rarely influence
one another.
When involving the insiders the most complicated enquiry that arises regarding the articles
of association is the level they reach to structure an enforceable agreement between
shareholders or between shareholder and the company itself.When it comes to the

1
http://www.legislation.gov.uk/ukpga/2006/46/section/7
2
Company Law, Mayson, French & Ryan (28th Edition 2011-2012) p 75-80
3
Company Law, Mayson, French & Ryan (28th Edition 2011-2012) p 81

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enforcement of the articles there needs to be a balance between how severely binding the
articles are.On one hand if the articles are applied to strictly than this could lead to the
limitation of the management's actions because of the constant fear that any decision taken
would be challenged even for the smallest disregard for a reasonably insignificant
provision.On the other hand there has to be a obvious awareness that the articles are part
of the constitution of a company and that they draw the line between the shareholders and
the otherwise basically unrestricted and unlimited powers of management. This was
highlighted in the case Re Peter's American Delicacy Company Ltd (1939).In this case it was
shown that if no limit is put upon the power of altering articles of association,a shareholder
could control the necessary voting power so the company would be conducted for his own
profit which would be fraud.
Under the common law the courts proved that the only relationship between members
which is based on a contract in the articles is between shareholders given the fact that they
own shares of the company therefore they are insiders(Wood v Odessa Waterworks Co.
(1889) 42).For example in London Sack and Bag v.Dixon[1943] the court held that the
dispute between the shareholder arised from a trading transaction and not as a product of
the shareholder's rights.For that reason the plaintiffs failed to prove that there was any
binding submission to arbitration because trading issued between members in this case
were entirely outside the company.This case show just one way on which the articles apply
and when.
4

When involving outsiders the courts have been reluctant to award them the right to take
use of the articles of association.Even if the companies often have rights set out for the
outsiders in the articles when the outsiders do not own shares they cannot be affected by
the contract that binds a shareholder to follow the articles.
Elley v. Positive Government Security Life Association (1876) 1 Ex D 88 case involved a
clause which was introduced in the articles which stated that the plaintiff should be the
company's solicitor and that he should take care of all legal aspects of the business.The
articles was signed by enough members and therefore it was registered.Later the company
employed another solicitor.The plaintiff brought an action for breach of duty.The court held
that the articles were reachable for shareholders and shareholders or for directors on behalf
of the company and shareholders(involving a contract).Therefore the relationship between
the solicitor and the company did not involve the creation of any contract.This was held
even though the plaintiff had become a member of the company after the signing of the
articles.The plaintiff failed.
5

This case showed that an outsider is a individual who is incapable of enforcing the articles or
be affected by any contract in the articles even though he might be a shareholder.As long as

4
Cases & Materials on Company Law, Andrew Hicks & S.H.Goo, 5th edition, p 160-161
5
Company law, Janet Dine & Marios Koutsias, 6th edition, p 62-p63
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he tries to claim under the articles when impersonating the outsider he will not be able to
use the articles.
This problem was reviewed in Hickman v Kent and Romney Marsh Sheepbreeders [1915] Ch
881.In this case the articles contained a clause which provided for a reference to arbitration
when any disputes between the company and it's members concerning the construction or
alteration appeared.The court held that an outsider who has been given rights by the
articles in his role as an outsider, whether he was or became a member after cannot sue
using those articles as contracts between himself and the company in order to enforce
those rights.
6

Reviewing the cases stated above we can conclude that an outsider cannot use the articles
of association but Salmon v Quin and Axtens Ltd[1909] proved the opposite.In this case the
Court of appeal granted an injunction relying on the fact that the company was trying to
avoid rules on decision making without following the procedure for amending the
constitution.The courts prevents the company to make a unconstitutional decision.As a
result the plaintiff enforced his outsider right as a managing director and vetoed certain
decisions taken by the board by suing as a member and relying on the applicable articles.
7

If we were to follow Salmon v. Quinn v Axtens[1909] Ac approach then an outsider would be
able to enforce it's rights in certain situations.After stating this we must have in mind that
even though the Salmon case was not overrulled Hickman v. Kent and Romey Marsh
Sheepbreeders was decided after.In addition in Beattie v. Beattie [1938] Ch 708 case the
Salmon approach was rejected.In this case Greene MR stated that "the two rights are, in my
judgement,perfectly distinct and quite different - the general right of a member as a
member and the right which the appellant as a party to the dispute is seeking to enforce".
In conclusion we may not be able to fully explain how a member of a company did succed in
cases such as Salmon v Quin and Axtens Ltd [1909] or in Ram Kissendas Dhanuka v Satya
Charan Law (1949) LR 77 Ind App 128.The explanation that could be given is the fact that
member could be allowed to enforce their rights as an outsider by using the insider set of
articles even though this is an exception to the internal management principle only when
the decision taking was made unlawfully.
8

Having examined these cases it is safe to say even after considerating the Salmon v. Quinn &
Axtens that the line between shareholder's rights and the outsider's rights remains intact
and clear.The Law Commission Report No.246 had S.14 as a subject when the commission
set out the recent law.In this report the Law Commission does not suggest the rejection of

6
Company Law, Mayson, French & Ryan (28th Edition 2011-2012) p 83

7
Cases & Materials on Company Law, Andrew Hicks & S.H.Goo, 5th edition, p 165
8
Company law, Janet Dine & Marios Koutsias, 6th edition, p 63
9
Company law, Janet Dine & Marios Koutsias, 6th edition, p 64

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S.14 as a type of contract on the contrary it only highlights the need for it in order to protect
the constitutional rights of the shareholders.However the report does suggest the need of
the addition of some regulations that have the aim to provide dispute resolution provisions
and a way out for the shareholders from a smaller company.The courts and the statutes
followed the guidance.
9

Even though an outsider would stand with small chances or no chances at all for enforcing
the rights from the articles he could still be able to use the provision in the articles as
evidence to prove that she was a employee, or as proof of contract (Re New British Iron
Company Ex Parte Beckwith [1898] 1 Ch 324, Read v. Astoria Garage (Streathham) Ltd
[1952] 2 All ER 292.


















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Bibliography
1. Janet,Dine and Marios,Koutsias, Company Law , ed.6th , 2007 , PELGRAVE
MACMILLAN,New York
2. Andrew,Hicks and S.H.Goo, Cases&Materials on Company Law, ed.5th, 2004,
Oxford University Press Inc, New York
3. Derek,French, Stephen,Mayson and Christopher Ryan, Mayson,French &
Ryan on Company Law, ed.28th, 2011-2012, Oxford University Press Inc, New
York
4. http://www.legislation.gov.uk/
5. http://www.bailii.org/
6. D G, CRACKNELL, CRACKNELL'S STATUTES Company Law, ed.3rd, 2001, Old
Bailey Press, London
7. Paul L. Davies, PRINCIPLES OF MODERN COMPANY LAW, ed.8th, Sweet &
Maxwell Ltd, London




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