Articles of Association and their Binding Force — Company Law Notes

Articles of Association and their Binding Force

If the Memorandum is the constitution, the Articles are the house rules — how meetings are called, how directors are appointed, how dividends are declared. And here is the twist the examiner tests: those house rules are a contract, but only between the company and its members as members — an outsider named in the articles gets nothing.

What the Articles are

The Articles of Association (AOA) are the company’s internal rulebook — the regulations for its management and the rights of members among themselves. They are subordinate to the Memorandum: an article that conflicts with the MOA or the Act is void. A company may adopt Table F (the model articles in Schedule I) wholly or partly.

MOA vs AOA — the classic contrast:

The MOA governs the company’s relationship with the outside world and its powers; the AOA governs its internal management.
The MOA is the charter; the AOA is subordinate to it.
MOA alteration is harder (special resolution + often outside approval); the AOA can be altered by special resolution alone (s.14).

Binding force (s.10)

On registration, the memorandum and articles bind the company and its members as if each had signed them — they operate as a contract. The reach of that contract:

Company ↔ members — binding both ways (each member is bound to the company; the company is bound to each member) — but only in respect of membership rights.
Member ↔ member — the articles create rights and obligations among members inter se.
Company ↔ outsiders — NOT binding. An outsider (even a member acting in a non-membership capacity, e.g. as solicitor) cannot sue on the articles. This is the rule in Eley v Positive Government Security Life — the articles named Eley as company solicitor, but he could not enforce that because it was an outsider right.

Alteration of Articles (s.14). A company may alter its articles by special resolution. But the power is limited:

the alteration must not conflict with the MOA or the Act;
it must be bona fide for the benefit of the company as a whole (Allen v Gold Reefs);
it cannot force a member to take more shares or increase his liability without consent;
an alteration that breaches an outside contract is valid as an alteration, but the company must pay damages for the breach (Southern Foundries v Shirlaw).

Section 10(1): the memorandum and articles, when registered, “shall bind the company and the members thereof to the same extent as if they… had been signed by the company and by each member.”

In Simple Terms: The articles are the internal rulebook and a contract — but only between the company and its members as members. A company can rewrite its articles by special resolution, yet if that rewrite breaks a contract with, say, its Managing Director, the change stands but the company pays damages.

flowchart TD
    ROOT["Articles (s.10 binding force)"]:::root
    ROOT --> A["Company <-> Members (membership rights)"]:::leaf
    ROOT --> B["Member <-> Member"]:::leaf
    ROOT --> C["Company <-> Outsider: NOT bound (Eley 1876)"]:::mid
    ROOT --> D["Alter by special resolution (s.14) - bona fide"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,color:#000;
    classDef mid fill:#FDE2E2,stroke:#991B1B,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — altering articles to breach the MD’s contract

Facts. A company alters its articles in a way that breaches its subsisting contract with its Managing Director.

Rule. A company cannot contract away its statutory power to alter articles (s.14); the alteration is valid, but if it breaks an outside contract the company is liable in damages (Southern Foundries v Shirlaw).

Apply. The alteration operates, but the MD’s contract has been breached.

Conclusion. The alteration is valid; the MD cannot stop it, but he can recover damages for breach of his contract.

Case Laws

Eley v Positive Government Security Life (1876) — outsider rights in the articles are unenforceable.
Allen v Gold Reefs of West Africa (1900) — articles may be altered bona fide for the company’s benefit.
Southern Foundries Ltd. v Shirlaw (1940) — alteration valid but subject to damages for breach of contract.

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