Seminar 5

Corporate Constitution &

The Contractual Effect and Alteration
of corporate constitution

1
M

Constitution of Company
² Two documents:
² Incorporation Form
® (memorandum is abolished)

² Articles of Association

² Note: separate shareholders agreements

2
 Section 86 NCO
Effect of articles

(1) Subject to this Ordinance, a company s articles, once

registered under this Ordinance or a former Companies
Ordinance—
(a) have effect as a contract under seal—
(i) between the company and each member; and
(ii) between a member and each other member;
and
(b) are to be regarded as containing covenants on
the part of the company and of each member to
observe all the provisions of the articles.

3
 Section 86 NCO
(2) Without limiting subsection (1), the articles
are enforceable—
(a) by the company against each
member;
(b) by a member against the company;
and
(c) by a member against each other
member.
(3) Money payable by a member to the
company under the articles—
(a) is a debt due from the member to the
company; and 4
 Incorporation Form (NCO)
› Standard forms: see Sch 1 Tables B-E.
› ss 1: company name
› ss 2: registered office
› ss 3: objects of company
› ss 4: liability of members limited [for limited
liability companies]
› ss 5: share capital clause - authorised capital
and par value [for companies limited by
shares]
› Details of original subscribers.

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 Company Names

² A company may register its name expressed in English or

Chinese or both languages
³ No name on Registrar s index or body corporate under an
ordinance, not prohibited (eg bank), approval beforehand
[government connection]
³ every company shall affix name on office, letterhead etc. (ss 659
to 661, Companies (Disclosure of Company Name and Liability
Status) Regulation
³ S. 107 NCO Change name by special resolution

² Also see s. 109Registrar may direct company to change misleading

or offensive name etc.
Shadow companies and Passing Off – A name should not cause
confusion whether the goods or services being sold by new
company come from another firm or company that has already
vested goodwill in the name. British Telecommunications plc v
One In A Million Ltd. [1999] 1 WLR 903
6
 Objects of the company
² Objects: business or activities of company .
² Former doctrine of "ultra vires": contract that
contravenes objects clause and outside of the
corporate capacity of the company is ultra
vires the company and void.

² Compare to act entered into or done in excess to directors authority

(company capacity but exceeded authority) and illegal act prohibited
by law/public policy (no company can be given capacity)
² Ultra vires concerned with competency to act not legality of contract

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Ashbury Carriage and Iron Co Ltd v Rich (1875)
LR 7 HL 653
› Company objects:
- Make, sell, lease rail
carriages
- Mechanical
engineering and
contracting
- Mining
› Company agreed to
build a railway in
Belgium
› Held: contract void as
ultra vires
8
 Rolled Steel Products Ltd v British
Steel Corp. [1986] ch 246
- MoA of RSP contained objects which empowered it to
give guarantees and grant security pursuant to its
objects
- Extend guarantee and granted security of its property to
assist BSC
-Failed to make payment on guarantee to BSC

-Receiver appointed. Sought to get monies paid out by

RSP for BSC as ultra vires

The question of company s corporate capacity is a matter

based solely on the construction of the objects clause
and is not determined by the good faith of directors or
knowledge of third parties

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² Brown-Wilkinson, L.J The critical distinction is,
therefore, between acts done in excess of the capacity
of the company on the one hand and acts done in
excess or abuse of the powers of the company on the
other. If the transaction is beyond the capacity of the
company it is in any event a nullity and wholly void:
whether or not the third party had notice of the
invalidity, property transferred or money paid under
such a transaction will be recoverable from the third
party. If, on the other hand, the transaction (although in
excess or abuse of powers) is within the capacity of
the company, the position of the third party depends
upon whether or not he had notice that the transaction
was in excess or abuse of the powers of the company.
(Lexis at 36)
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 Rationale and practical effects of
ultra vires doctrine
² Rationale of doctrine: protection of shareholders
and creditors .
² Injustices of doctrine in practice.
² Circumventing the doctrine: very wide objects
clauses drawn up (independent and supplemental
clauses)
² Difficulty distinguishing between objects and
powers

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 Abolition of ultra vires doctrine: 1997
amendments

² Company has capacity of natural person:

s115 NCO .
² Stating objects is optional: s 82(2) NCO.
- Unless members want to dispense with
"Limited" in the name

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 Where company does have objects
Does it have an effect?
² Company must comply with objects clause:
s 116(1 ) NCO .
² Member may bring proceedings to restrain
it from acting contrary to objects: s 116(3)
(subject to proviso in s116(4)) .
² Action contrary to objects clause is not
invalid by reason only of the contravention:
s 116(5).

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Effect of ss 115 & 116 NCO: examples

² Objects clause: restriction to business of

running a restaurant.
² Directors wish to venture into retailing
clothes.
² Scenario 1: directors have not yet acted on
intentions .
² Scenario 2: directors have caused
company to contract with clothing
manufacturer.
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 Scope of s 116(5) NCO
› Difference between corporate capacity and directors'
authority .
› Company has capacity to act outside objects clause:
see s115 .
› Directors do not have authority under articles to act
outside objects clause: see s 116(1) . (apparent
authority)
› Company might not be bound to transaction outside
objects clause if third party has notice of directors
acting outside of authority .
› Third party will not have constructive notice of objects
clause in articles: see s 120 (partial abolition of
doctrine of constructive notice).

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 Operation of ss 116(5) and 120
NCO: examples

² Scenario 3: clothing manufacturer not

aware of restriction in objects clause .
² Scenario 4: clothing manufacturer does
know of restriction in objects clause (ie
actual notice).

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 Articles of Association
² Regulate company's internal management
and administration.
² Articles registered.

² Companies limited by shares:

- registering articles is optional.

Current regime (under CO):
Schedule 1 Table A part 1 (public companies)
and part 2 (private companies) - default
articles (see s 11 CO).
Note Tables C (limited by Guarantee not share
capital), D ,E (unlimited)
[see Companies (Model Articles) Notice (LN 77
of 2013)] 17
 ss. 79 and 80 of NCO
² S. 79 NCO. Adoption of model articles
A company may adopt as its articles any or
all of the provisions of the model articles
prescribed for the type of company to which
it belongs.

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² S. 80 NCO - Application of model articles
to limited company
² (1) On the incorporation of a limited
company, the model articles that are
prescribed for the type of company to
which the company belongs and that are
for the time being in force, so far as
applicable, form part of the company’s
articles in the same manner, and to the
same extent, as if
² those model articles had been registered 19
 Matters covered in Table A
² Capital - regulations 2-48 .
² Members - regs 49-76 and 132-135 .
² Officers - regs 77-114 .
² Distributions and disclosure - regs 115-131.

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 Contractual effect of articles

² Section 86 NCO: statutory contract

between:
- company and each member
- a member and each other member.

Contractual rights as members qua

members

21
 Ng Kin Kenneth v HK Football Assn Ltd
[1994] 1 HKC 734
› Ng, a football referee, was
dismissed. He alleged breach
of HKFA's articles. Defendant
asked for stay by arguing that
articles provided all disputes to
be settled by arbitration.
› cap 341: arbitration agreements
to be in writing
› Held: s.23 means AA
constituted a valid written
agreement to arbitrate between
HKFA and members within the
Arbitration Ordinance.
However HKFA articles did
not cover disputes between
members and association.
22
 Member enforcing articles against
company
² Wood v Odessa Water Works (1889) 42
Ch D 636
² Articles provided for cash dividends to be
paid to shareholders.
² Company resolved in general meeting to
issue debentures in lieu of dividends.
² Wood sought an injunction .
² Held: general meeting resolution
inconsistent with articles and injunction
granted. Action Ultra vires (exception to
rule in Foss v Harbottle, see also 23(1A) 23
 Company enforcing against member

› Hickman v Kent or
Romney Marsh
Sheep Breeders' Assn
(1915) 1 Ch 881.
› Articles provided for
arbitration of disputes
between association and
its members
› Hickman went to court re:
irregularity, Association
sought to expel him
› Association got stay of
Court proceedings
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 Member enforcing against members

² Rayfield v Hands [1960] 1 Ch 1

² Articles: members wishing to sell shares to
inform directors who will take shares
equally between them at fair value
² Rayfield wanted directors to buy shares
(art. 11 of articles)
² Held: directors AS MEMBERS had to buy.
"directors cannot divest themselves of their
character of members of the company
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 Limits on enforcement (Outsider s
Rights)
² Eley v Positive Life Assurance Co [1898] 1 Ch 324
- Articles: Eley to be solicitor of company ... not
removed except for misconduct
- Eley acted as solicitor for a time. Fired. Sued for
breach of contract.
- Held: articles did NOT create contract between
company and Eley in capacity as solicitor even
though Eley was shareholder at time of action
(though not when article made)
² Implied contract: Re New British Iron Co. [1898] 1
Ch. 324 (article gave salary to directors. Company
in liquidation. Directors claim as creditors. Inferred
contract. )

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 Limits on enforcement
² Members can enforce articles only in
capacity as members: Eley; Hickman v
Kent or Romney Marsh
² Remedies for breach will not be damages
but a declaration or injunction .
² McDougall v Gardiner (1875) 1 Ch D 13:
members cannot enforce articles in
relation to rights vested in company (as
opposed to the members' personal rights).

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 Companies (Amendment) Ordinance 2003

² Effect of s 23(1A) CO (inserted by 2003

amendments) – s. 86 NCO
- See SCCLR Corporate Governance
Review Consultation Paper on Proposals
Made in Phase I of the Review, Ju1 2001,
paras 17.01-17.09.
² Possible limitations to the scope of
enforcement of articles by members under
the provision.
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 Alterations to articles

- Company name: s 107, 108, 111(1) NCO.

- Objects: s 89 NCO.
- Reduction of capital: ss 209 to 212, 236, 267
NCO
- arrangement or reconstruction: ss 668 to 670,
673, 674, 677; ss 671, 672, 675 NCO.
- Alteration of provisions in memorandum which
could have been in articles: s 86(6), 86(9), 90
NCO .
• Generally special resolutions required for above.
(See also s 564 NCO).
• Articles: alter by special resolutions under s 87, 88.
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 General law restrictions on alterations

² Allen v Gold Reefs of West Africa Ltd. [1900] 1

Ch 656(Eng CA)
² Concerned amendment to articles giving
company a lien on fully-paid shares to secure
any indebtedness of a member . Executer of
Zucanni s Estate (Allen) objected saying thathe
was only person holding fully paid shares and
therefore only person affected.
² Lord Lindley said: power to alter subject to
general principles of law and equity applicable to
majorities who bind minorities. Must be lawful
AND bona fide for benefit of company as a whole.
² Majority: No mala fides (bad faith) in present
case.
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Meaning of the test in Allen v Gold Reefs
² Subjective or objective test?
² Whose interests to consider in looking at "benefit of
the company"? Is it fiduciary? No. For purposes foreign
to company’s operations will not be bona fide benefit
for company. Greenhalgh v Ardene Cinemas Ltd [1951]
Ch 286.
² Can members vote in own interests?
- Yes. Not fiduciaries vis a vis each other and vote as
proprietary right as shareholders
- But decision of majority must be for benefit of
company - must not be for some personal gain not
within the contemplation of the parties in the conferral
of power on the majority: cf Peters' American Delicacy
Co Ltd v Heath (1939) 61 CLR 457 per Dixon J.
- Is alteration always invalid where majority benefits at
expense of minority? Cf Greenhalgh v Ardene 31
 Case examples
² Greenhalgh v Ardene Cinemas Ltd (Stock split and new article:
removal of pre emption rights is allowed by special resolution
approved)
² Alterations giving general power to expropriate shares: Brown
v British Abrasive Wheel [1919] 1 Ch 290; Dafen Tinplate v
Llanelly.
² Alteration allowing expropriation of shares of a member
competing with the company (Sidebottom v Kershaw Leese
and Co Ltd [1920] 1 Ch 154).
² Alteration of articles allowing forfeiture of dividends already
declared not allowed (Re Hongkong Spinning Weaving and
Dyeing Co Ltd (1917) 12 HKLR 1).
² Alteration creating new class of shares conferring control on
chairman allowed where a reasonale shareholder would have
The Court of Appeal said that he should
² instead have applied the test laid down in Shuttleworth's case,
namely, whether reasonable shareholders could have
considered the that an amendment was for the benefit of the
company and that the proposal is made in good faith. Citco
Banking v Pusser’s Ltd).
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 Australian approach
² Gambotto v WCP Ltd (1995) 182 CLR 432
² Articles altered to allow 90% holder to expropriate
minority shareholdings.
² Allen v Gold Reefs inapplicable where alteration involves
conflict between interests of shareholders.
² Held:
- Where alteration involves expropriation of shares or
proprietary rights: valid only if (i) alteration was for a
proper purpose, and (ii) the alteration is not oppressive
(ie, must be fair in procedure and price).
- Where alteration involves other conflicts between
shareholders: valid unless beyond any purpose
contemplated by the articles or is oppressive.
² On the facts, the alteration was invalid.
² Importance placed on proprietary nature of shares. 33
Restrictions on alterations under statute

² Section 92 NCO: no member can be

forced to take more shares or increase
liability - unless shareholder agrees in
writing to be bound by the alteration
(before or after made) .
² Class rights: ss 182-183, 193 and 623
NCO.
² Unfair prejudice remedy: s. 722-726 NCO
[s 168A CO]. 34