We discussed on Section 25 of the Companies Act, 1956 in the earlier issue and in the present issue we shall proceed with Sections 26 to 36 which deals with the Articles of Association.
Query # 1 : Normally articles constitute a contract between members and the company, but whether the articles can also constitute a contract between the company and an outsider if at all his name is stated therein ?
Decided Case Law : Eley v. Positive Govt. Security Life Assurance Co. Ltd. [1876] 1 Ex. D. 88 (HL)
Facts of the case : The articles provided that E would be appointed as solicitor of the company. E was not so appointed, and the directors appointed another person. The question was whether the articles constituted a contract between E, a non-member, and the company.
Clarification : Held that the agreement was merely between the members to appoint E or merely a direction to the directors to appoint E, but it did not constitute any contract between E, a non-member and the company. The act of directors in employing another person as solicitor was, no doubt as between themselves and the company, a violation of the articles, but that could be condoned by the company at general meeting.
Conclusion : The articles, taken by themselves are simply a contract between the shareholders inter se, and cannot give a right to a person who was not a party to the contract, though named therein.
Query # 2 : It is memorandum and articles of association that constitute a contract between company and each member of company; is the prospectus also a contract and can it prevail over the articles ?
Decided Case Law : Globe Motors Ltd. v. Globe United Engg. & Foundry Co. Ltd. [1975] 45 Comp. Cas. 429 (Delhi)
Facts of the case : The company and its shareholders are two different legal entities. When the company is incorporated, it adopts its memorandum and articles of association. These are the statutory terms of contract governing the relationship between the company and the shareholders. Persons who contributed the share capital become members of the company on these terms. The question was whether the prospectus issued by the company inviting the public to subscribe capital and buy the shares of the company constituted a contract between the company and the public.
Clarification : Held that where the prospectus was issued long after the terms of the contract between the company and the members were settled by the articles, the representation made in the prospectus inviting the public to subscribe capital and buy the shares of the company would not change the terms of the contract between the company and the members which were already settled.
Conclusion : Hence the prospectus did not become a contract between the company and the members in as much as the subscribers buying the shares did so with the knowledge that the contract would consist of the memorandum and the articles of association and not of the representations made in the prospectus. Any variation between the language of the prospectus and an article was, therefore, to be construed as the article prevailing over the prospectus.