Importance and effects of Articles of Association

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Each member is bound to the company Company is bound to its members Each member is bound to other members inter s Company is not bound to outsiders

Each member is bound to the company

Memorandum and Article contains clauses which binds the company and its members. Each member is bound by the provisions in the memorandum and articles of the company. If any member obstructs the observance of these provision of fails to observe the provisions , then the company can sue such member. E.g. Boreland trustee Vs. Steel brother & co. ltd The article of defendant company had a provision that shares held by any member who becomes bankrupts would be sold to other only at the price decided by the directors of the company. The trust in bankruptcy claimed that they will dispose of the shares as per their own will but it was held that trust is bound by the terms of the articles of the company and cant act against it.

Company is bound to its members Like members, company is also bound to its member by the provisions of articles. If any act of company is against the provision of memorandum and articles of company, and it damages the right of any member then that member can sue the company. E.g. Jonson Vs. Lyttles Iron Agency Company had irregularly fortified shares of one of its members, member sued the company and it was held that companys action was invalid.

Each member is bound to other members inter se Article binds members among themselves. No member of company in his own capacity sue the other members or directors or officers for any wrong doing. He can do so through company. E.g. Dhakeshwari cotton mills Vs. Kamal Chakravorty and others If majority of the members of the company acts beyon their legal authority as defined by articles and memorandum then one person can file a suit against company.

Company is not bound to outsiders Outsiders are those who are not the members of the company. The memorandum of association and article do not create any contractual obligation with outsider. Unless a contract is made by the company. E.g. New British Iron company The article had provision that director of company would be paid 1000 per annum. However company did not pay. Director filed suit against company. It was held that in absence of any formal contract between directors and company, director had accepted to work for the company as a director on conditions specified in the articles. The terms of the articles, therefore constitutes, a contract which director could enforce against company.