Legal Effect of Articles & Memorandum on Company Relationships, Study notes of Law

Download Legal Effect of Articles & Memorandum on Company Relationships and more Study notes Law in PDF only on Docsity! THE LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF A COMPANY AFTER THE INTRODUCTION OF THE COMPANIES AND SECURITIES LEGISLATION (MISCELLANEOUS AMENDMENTS) ACT 1985 by G.A. Egert* The memorandum and articles of association comprise the company's constituent documents. Under the Companies Code 1981 the main provision dealing with the legal effect of the memorandum and articles of association is s.78( 1). Prior to the introduction of the Companies and Securities Legislation (Miscellaneous Amendments) Act 1985's.78(1) provided as follows: Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company, and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles. S. 78(1) now provides as follows:2 Subject to this Act, the memorandum and articles of a company have the effect of a contract under seal - (a) between the company and each member, (b) between the company and each officer, (c) between a member and each other member, under which each of the above-mentioned persons agrees to observe and perform the provisions of the memorandum and articles as in force for the time being so far as those provisions are applicable to that person. The broad effect of the original s.78(l) was that the memorandum and articles were intended to have contractual effect. The scope of this statutory contract has been the subject of considerable controversy both in Australia and in England.3 The unclear wording of the Section and its predecessors has given rise to conflicting judicial interpretation. Thus, in the past it has not been entirely clear which parties were bound by the contract which the memorandum and articles constitute. Further, there has been some conflict in the cases relating to the ability of a member to enforce those articles of association which do not confer rights on him in his capacity as a member but confer rights in some outsider or private capacity. There has also been some confusion in the cases as to the extent to which - the rule in Foss v. Harbottle4 will defeat an individual or minority shareholders action when there has been an infraction of the statutory contract. It is not surprising then that it has *B.A., LL.M. (Qld), Barrister-at-Law (Qld), Senior Lecturer-in-Law, Queensland Institute of Technology. 1. Hereafter referred to as the 1985 Amending Legislation. 2. This provision took effect from 31 March 1986. 3. Beattie v. E. and F. Beattie Ltd [1938] Ch. 708 at 721 per Lord Greene M.R. 4. (1843) 2 Hare 461. 46 QLD. INSTITUTE OF TECHNOLOGY LAW JOURNAL been said in relation to the English equivalent of the original s.78(l)5 that 'it has been so overlaid with judicial interpretation that, on any count, it no longer means what it says and that a redrafting of it is long overdue'.6 An early explanatory memorandum in relation to the introduction of the present s.78(l) specified that the purpose of the amendment was to clarify the law relating to the contractual status of the memorandum and articles.7 It is intended by the writer to examine the consequences of the original Section 78(1) and then consider the effect of the new provision in order to ascertain whether the law has been clarified. It is further intended by the writer to briefly examine the relationship between s.78(l) and s.574 of the Companies Code. 1. Relationship between a Company or its Members and Non-Members Under the former s.78( 1) and its English counterpart, the courts have considered that the provisions of the articles and the memorandum do not constitute a contract binding the company or any member to a non-member because of the principle of privity of contract.8 Hence a solicitor,9 promoter,10 or director11 of a company to whom a right has been given by the articles has not been able to enforce such right upon the basis that there is a contractual relationship between himself and the company unless it could be shown that the relevant articles formed part of a contract independently of the articles and the memorandum.12 It is thought that this principle is also applicable to debenture holders or their trustees who are entitled to appoint or remove a director under the Articles and that it should not be presumed that such a provision would be legally enforceable by such debenture holders or their trustees despite what might appear to be judicial pronouncements to the contrary in Woodlands Ltd v. Logan & Ors.13 The terms of the new provision alter this position to a limited extent. Section 78(1 )(b) provides that the memorandum and articles of a company constitute a contract between the company and each 'officer'.14 There is however, no provision such as that set out in Clause 40(5) of the National Companies Bill 1975 allowing outsiders, such as debenture holders or their trustees, to enforce an article to appoint or remove a director or other officer notwithstanding that such person is not a member or officer of the company. It is understood that such a provision was considered in the early stages of redrafting the former s.78(l). 2. Relationship between a Company and its Members The former s.78(l) provided that the company and members were bound by the memorandum and the articles only to the extent that they had been signed and sealed by the members, not by the company. The English counterpart of this provision is to the same effect. As a result of this unclear wording English authorities until the end of the nineteenth 5. Section 20(1), Companies Act 1948. 6. L.C.B. Gower, The Principles of Modern Company Law, (1979) at 320. 7. Explanatory Paper Companies and Securities Legislation (Miscellaneous Amendments) Bill (No.2) 1984, Business Affairs Division, Commonwealth Attorney Generals Department June 1984. at 53. 8. Hickman v. Kent or Romnev Marsh Sheep-Breeders 'Association [ 1915] 1 Ch. 881 at 900 per Astbury J.; Forbes v. N.S. W. Trotting Club Ltd [1977] 2 N.S.W.L.R. 515 at 520 per Hutley J.A. 9. Elev v. Positive Government Security Life Assurance Co. Ltd (ISI6) 1 Ex.D. 88 (CA). 10. Re English & Colonial Produce Co. [1906] 2 Ch. 435. 11. Browne v. La Trim dad (1888) 37 Ch.D. 1; Melhado v. Porto Alegre Railway Co. (1874) L.R. 9 C P 503 12. Re New British Iron Co. [1898] 1 Ch. 324. 13. [1948] N.Z.L.R. 230. In this type of case it was suggested by Cornish J. of the New Zealand Supreme Court that enforcement by legal proceedings against the company was unnecessary, as the outsiders were able to enforce their rights by merely exercising them. 14. As to the meaning of'officer' see s.78(5) post. THE LEGAL EFFECT OF THE MEMORANDUM 49 this principle extends to cover the contract between members as well as that between members and the company.42 It has been judicially stated that the time honoured expression 'in his capacity of member' means that a member may only enforce rights which are common to himself and all other members43 and not rights which may concern him in his capacity as outsider or in some private capacity as for instance as solicitor, promoter or director.44 Thus, in Beattie E. & F. Beattie Ltd45 it was held that an article which provided that disputes between the company and its members must be referred to arbitration would not avail a person whose dispute was between the company and himself in his capacity as a director, even though he was also a member. Initially, in the Australian context, there was uncertainty about the application of the principle in relation to the former s.78(l). Thus, in Heron v. Port Huon Fruitgrowers' Co-operative Association Ltd Knox C.J., Gavin Duffy and Starke JJ. made the following statement: The law governing [this] contention has been the subject of very recent examination and statement by Astbury J. in Hickman v. Kent or Romney Marsh Sheep-Breeders' Association, but his opinion shows that the matter is still surrounded with a good deal of difficulty.46 In more recent times, however, Burt J. in Re Caratti Holding Co. Pty Ltd made the following statement in support of the principle: It was said that the articles cannot as against the company or as against another member confer upon a shareholder rights in some capacity other than that of a shareholder. That as a general proposition, is now well established, Hickman's Case [1915] 1 Ch. 881, now being regarded as the leading authority.47 In that case Burt J. held that the rights conferred upon the registered holder of a life governor's share to compulsorily acquire the shares of any other member at a sum equal to the capital paid up on the shares were conferred upon the holder in his capacity of shareholder or member. The sentiment expressed in Re Caratti Holding Co. Pty Ltd has been re-iterated in a number of other Australian cases.48 In particular, there is a series of cases which has adopted the principle and which has suggested that the articles in a home unit company allocating rights of enjoyment of particular areas in association with the particular shares do relate to members in their capacity as such.49 The principle of the necessity for the articles and memorandum to confer rights or obligations on the member in his capacity as member has been criticized upon a number of grounds. The first ground of criticism is that this restrictive principle has sometimes led to a strained construction of the articles by the courts.50 Thus, in Rayfleld v. Hands51 Vaisey J. construed an article imposing an obligation upon the directors of a company, who were also 42. London Sack & Bag Co. v. Dixon & Lugton supra n.31 at 765-766 per Scott J.; Ray field v. Hands supra n.33. 43. Beattie v. E. & F. Beattie Ltd supra n.41 at 722 per Greene M.R. * 44. Hickman v. Kent or Romney Marsh Sheep-Breeders' Association supra n.8 at 900 per Astbury J. 45. Supra n.41. 46. Supra n.19 at 323. Contrast the obiter dicta of Isaacs J. at 339-340. 47. Supra n.19 at 99. 48. H.H. Halls Ltd w.Lepouris{ 1964) 65 S.R.(N.S.W.) 181 at 189, per Macfarlan J.; Forbes v. N.S. W. TrottingLtd supra n.8 at 520 per Hutley J.A. 49. Fisher v. Easthaven ( 1963) 80 W.N. (N.S. W.) 1,555; Crumpton v. Morrine Hall Pty Ltd( 1965) N.S.W.R. 240 at 243 per Jacobs J.; Magill v. Santina Pty Ltd supra n. 19 at 1111 -1112, per Hutley J.A. and at 1113-14 per Glass J.A.; Brentwood Village Ltd v. Corporate Affairs Commission supra n.19 at 1008-9 per McLelland J. 50. S. Mayson & D. French, A Practical Approach to Company Law, (1982) at 33; Gower, supra n.6 at 317. Cf. H. A. J. Ford, Principles of Company Law, (1982) at 59. 51. Supra n.33. 50 QLD. INSTITUTE OF TECHNOLOGY LAW JOURNAL members of the company by virtue of their share qualification, to purchase the shares of a retiring member at a fair value, as an obligation imposed upon them in their capacity as working members of the company. As a result, Vaisey J. enforced the obligation on the directors to take the plaintiffs shares at a fair value. It has been pointed out that as a general statement it is palpably incorrect to treat directors as if they were merely a sub-species of member.52 The second ground of criticism is that the principle is of questionable provenance because it was initiated by Astbury J. in Hickman v. Kent or Romney Marsh Sheep-Breeders'Association51 as an attempt at reconciling the conflict in the cases upon the question of the parties to the statutory contract by reference to the terms of the contract. It has been suggested that Astbury J. was attempting to extract from the cases a principle which is not explicitly or even implicitly contained in the judgments.54 In the case itself, the plaintiff brought an action against the company relating to his expulsion from the company despite the fact that the articles provided for reference of disputes between members and the company to arbitration. Astbury J. held that the articles amounted to a contract between the company and the member and directed that the matters in dispute be referred to arbitration and the action stayed. Thus, Hickman's Case was concerned only with the issue of contract or no contract between company and member. No question was involved in the argument on the decision as to whether it went beyond the ambit of membership.55 Nevertheless, Astbury J. was confronted with statements of principle in cases such as Eley v. Positive Government Security Life Assurance Co. Ltd,56 Melhado v. Porto Alegre Railway Co.51 and Browne v. La Trinidad58 to the effect that the English equivalent of the former s.78(l) did not create a contract between a company and its members. He rationalized these cases upon the basis of the principle under discussion with the effect that these cases are now respectively cited as authority for the proposition that a member cannot enforce an article which relates to him in his capacity as solicitor, promoter or director.59 However, a close reading of these cases makes it clear that they were not influenced by the Hickman principle. Thus, in Eley v. Positive Government Security Life Assurance Co Ltd60 it was held by the Court of Appeal that the plaintiff, who was appointed under the articles as the company's solicitor for a fixed period, could not rely upon the articles to perpetuate his retainer, even though the period had not expired and even though he became a shareholder because there was no contract between the plaintiff and the company but only between the members. Similarly, in Melhado v. Porto Alegre Railway Co.6' the plaintiffs, who were promoters of the defendant company, were held to have no action against the company for non-payment of preliminary expenses under the articles of association, which provided in directory terms for the payment of such expenses, as the Court of Appeal found there was no contract between the plaintiff and the defendant. Again, in Browne v. La Trinidad61 the Court of Appeal applied Eley's Case to the situation where a director, who was also a 52. Wedderburn, supra n.36 at 149; Gower, supra n.36 at 402- D W ChantW <Tho Q H O - ^ I ^ r- Contract in Western Australia', (1976) 12 UW.ALR333 at 346 Shareholders Corporate 53. Supra n.8. 54. R. Gregory, 'The Section 20 Contract' (1981) 44 M.L.R 526 at 530-1 55. Ibid, at 535-6. 56. Supra n.9. 57. Supra n . l l . 58. Supra n . l l . 59. Gregory, supra n.54 at 531. 60. Supra n.9 at 90. 61. Supra n.l 1 at 505-6. 62. Supra n.9 at 13-14 per Cotton L.J., and at 14-15 per Lindley L.J. THE LEGAL EFFECT OF THE MEMORANDUM 51 shareholder, sought to restrain his removal as a director by the company in general meeting despite the fact that the Court was prepared to assume that there was a stipulation incorporated into the articles of association that he would be appointed for a fixed term. Thus, it is apparent that the legal reasoning in this trilogy of cases is inconsistent with the Hickman principle. A third ground of criticism is that, notwithstanding the Hickman principle, there has been a number of English and Australian decisions in which rights and obligations under the articles, which have not affected a member in his capacity as member, have been enforced. Thus, the Courts have allowed a shareholder-director, suing as a single shareholder or in a representative capacity63 to enforce rights conferred by the articles upon him as a director to hold office, or to participate in management, or to exercise a veto over board decisions even though this has had the effect of allowing the enforcement of'outsider rights'.64 The confusion which these cases have caused is well illustrated by Quin and Axtens Ltd v. Salmon,65 In that case the company's articles vested the general management of the company's business in the directors subject to the qualification that any resolution for the acquisition or letting of premises would be invalid if either of the two managing directors dissented therefrom. The directors passed resolutions for the letting of premises from which Salmon, one of the managing directors, dissented. Salmon, suing as a shareholder by way of representative action, sought an injunction to restrain the company acting on the resolutions. The House of Lords upheld the decision of the Court of Appeal granting an injunction and thereby indirectly allowed Salmon to enforce the right given to him as managing director in the articles to veto any resolution for the acquisition or letting of premises. The attempt by Lord Greene M.R. in Beattie v. E. & F. Beattie Ltd66 to rationalize that case and Salmon's case by identifying the latter case as one in which 'the plaintiffs right as a member was being enforced' loses its cogency when a case like Re Standard Salt and Alkali Ltd; Ex parte Lahiff1 is considered. In that case it was stated by Napier J. of the South Australian Supreme Court, applying the Hickman principle that an article which appointed a particular person, whether he was a member or not, as managing director for a specified period, could not be enforced against the company. Despite the abovementioned criticisms, commentators have generally supported the Hickman principle.68 There have howevever, been some divergent views as to the construction to be applied to this provision. Thus, it has been suggested that every member of a company has a right to have the company's business conducted in accordance with the contract in the articles even if that means indirectly the enforcement of outsider rights vested either in third parties or himself, so long as he sues in his capacity as member and not in his capacity as outsider.69 Another view postulates that outsider rights will be enforced if two conditions are fulfilled. These are that the member sues in his capacity as - 63. A representative action is one brought on behalf of all the members of the company, except those members responsible for the alleged wrong, who, with the company, are made defendants to it. 64. Pulbrook v. Richmond Consolidated Mining Co. (1878) 9 Ch.D. 610; Imperial Hydropathic Hotel v. Hampson (1882) 23 Ch.D. 1; Quin and Axtens Ltd v. Salmon supra n. 17; Hayes v. Bristol Plant Hire [ 1957] 1 All E.R. 688; Re Richmond Gate Property Co. Ltd[ 1965] 1 W.L.R. 335; Ryan v. South Sydney Junior League Club Ltd [1974] 3 ACLR 486. 65. Supra n. 17. 66. Supra n.41 at 714. 67. [1934] S.A.S.R. 168 at 171. 68. Gower, supra n.6 at 317-318; Pennington supra n.34 at 64-65; R. Baxt, Introduction to Company Law (1986) at 44-5. 69. K.W. Wedderburn, 'Shareholder's Rights and the rule in Foss v. Harbottle' (1957) 15 C.L.J. 193 at 212-13; K.W. Wedderburn, supra n.36 at 150-51; Gregory, supra n.55 at 531. 54 QLD. INSTITUTE OF TECHNOLOGY LAW JOURNAL articles upon him as a director to hold office or to participate in management or to exercise a veto over board decisions.90 In addition to this incongruous position, there may be noted the criticism that4it seems rather absurd to regard directors as outsiders since they stand in a fiduciary relationship to the company which in part is defined by the articles'.91 As already noted, s.78(l)(b) now provides that the memorandum and articles constitute a contract between the company and each 'officer'. The 'officer' need not be a member. However, the meaning of'officer' for the purposes of the section is a very narrow one when compared with the definition in s.5(l) of the Companies Code. Section 78(5) provides that 'officer', means a director, the principal executive officer or a secretary of the company. In particular, it is to be noted that reference to 'employee of the corporation' is excluded. The philosophy then must be that principally the proper place for contract between the company and its officers is not in the memorandum and articles of associaton but in a service contract. It has been suggested that as there is already a wide range of provisions in the Companies Code dealing with company officers their powers, duties and potential liabilities, s.78( 1 )(b) may be seen to be slightly superfluous.92 However, it is thought that such provision would enable a director to enforce his right to remuneration specified under the articles and would oblige him to take up his minimum share qualification where the articles so require. Further, it is thought by the writer that the provision would now provide a sound legal explanation for the abovementioned cases in which the courts have allowed a director, suing as shareholder, to enforce rights conferred by the articles upon him as a director against the company. There should be no need in the future for the Courts to construe such articles as affecting an officer in his capacity as shareholder. 6. Enforcement of the Articles or Memorandum of Association and the Rule in Foss v. Harbottle The extent to which a shareholder can enforce the statutory contract created under provisions like s.78(l) measures the extent to which the rule in Foss v. Harbottle93 will not defeat an individual or minority shareholder's action. This rule has two aspects - the 'Proper Plaintiff aspect and the 'Internal Management' aspect.94 The 'Proper Plaintiff aspect is to the effect that if a wrong is done to the company, the company acting normally through its board of directors95 is the only proper plaintiff in an action to prevent or recover in respect of the wrong. This principle is a consequence of a company having a legal personality separate and distinct from its membership. The 'Internal Management' Aspect is based upon an elementary principle of law relating to companies that the Courts regard themselves as having no jurisdiction to interfere with the internal management of companies. Thus, where the alleged wrong is one which might be made binding on the company and all its members, by a simple majority of the members, no individual member of the company is entitled to maintain an action in respect of that matter. The relationship between the two aspects may be explained as follows.96 If the alleged wrong is ratifiable by a simple majority of the members of the company, then no wrong has been done to the company and there is nothing in respect of which anyone sue. If, on the other hand, a 90. Supra n.64. 91. J.H. Farrar, 'Company Law', (1985) at 104. 92. Australian Company Law and Practice, (CCH Australia Ltd), supra n.72 at 9,804. 93. Supra n.4. 94. Edwards v. Halliwell [ 1950] 2 All E.R. 1064 at 1066; Prudential Assurance Co. Ltd\. Newman Industries \ 19821 1 Ch. 204 at 210. 1 J 95. See Table A. Art 66. 96. Edwards v. Halliwell supra n.94; Prudential Assurance Co. Ltd v. Newman Industries supra n.94. THE LEGAL EFFECT OF THE MEMORANDUM 55 simple majority of the members opposes what has been done, then there is no valid reason why the company should not institute the suit. The rule in Foss v. Harbottle will not apply where a member has a personal right of action for wrongs done to himself in his capacity as member.97 Further, in exceptional circumstances, a member may sue upon behalf of his company, by way of representative or derivative action, to remedy a wrong done to his company. Where a member has a personal right of action or a member may sue by way of derivative action the wrong complained of cannot be remedied by the company in general meeting passing an ordinary resolution. Where there is an infraction of the company's articles there is a number of effects.98 Firstly, there is a wrong done to the company by the perpetrator of the irregularity. Secondly, the company is put in breach of the statutory contract vis-a vis its shareholders where the irregularity occurs, for instance, in the passing of a resolution. Thirdly, a shareholder is put in breach of the statutory contract vis-a vis the other shareholders where, for instance, such shareholder fails to fulfill his obligations to the company. The former s.78(l) created, and its English counterpart creates, a statutory contract in respect of 'all the provisions of the memorandum and the articles'. However, the Courts have taken the view that this does not mean that an individual shareholder has the right to have each of the provisions in the memorandum and articles enforced by declaration or injunction. Indeed, in Salmon v. Quin & Axtens Ltd Farwell L.J. took the view 'that it [might] well be that the Court would not enforce the covenants as between individual shareholders in most cases'.99 The reason for this non-enforcement is that the Courts may consider any breach of the memorandum or articles to be one affecting a corporate right only and therefore ratiflable by the members in general meeting.100 However, breaches of the constituent documents which infringe a shareholder's individual rights conferred upon him in his capacity as member are not ratifiable by the members in general meeting.101 Whether a member has a personal right of action for any breach or attempted breach of the statutory contract is a question which has not been fully answered by the Courts and it may be said that the case law is still in a state of confusion.102 However, it may be said with some degree of certainty that an individual member will have a personal right of action in the following circumstances:103 (a) where the infraction of the statutory contract by the company prevents the company's organs being properly constituted such as when directors are irregularly elected,104 directors hold office without the prescribed qualifications,105 directors act without a quorum,106 persons act as directors without lawful authority107 and directors are excluded from board meetings;108 97. Edwards v. Halliwell, ibid. 98. R.J. Smith, 'Minority Shareholders and Corporate Irregularities', (1978) 41 M.L.R. 147 at 151. 99. Supra n.32 at 318. 100. See for example MacDougall v. Gardiner (1875) 1 Ch.D. 13. 101. Edwards v. Halliwell supra n.94 at 1067. 102. Smith, supra n.9 at 155; R.R. Druery, The Relative Nature of a Shareholder's Right to Enforce the Company Contract', (1986) 45 C.L.J. 219 at 238. 103. See generally Ford, (1986), supra n.73 at 485-7. 104. Ryan v. South Sydney Junior Rugby League Club Ltd supra n.64; Papaiannoy v. The Greek Orthodox Community of Melbourne (1979) C.L.C. 32,209. 105. Catesby v. Burnett [1916] 2 Ch. 325. 106. Kraus v. J.G. Lloyd Pty Ltd [1965] V.R. 232 at 235. 107. Ibid. 108. Pulbrook v. Richmond Consolidated Mining Co. supra n.64; Hayes v. Bristol Plant Hire, supra n.64. 56 QLD. INSTITUTE OF TECHNOLOGY LAW JOURNAL (b) where there is any irregularity in the passing of a special resolution which is required under the memorandum or articles;109 (c) where the plaintiff seeks to restrain a threatened breach of any provision in the memorandum or articles.110 However, it is probably not correct to suggest that apart from these circumstances 'the Court will incline to treat a provision in the memorandum or articles as conferring a personal right on a member only if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution'.111 The Courts have not restricted the personal action to those breaches of the statutory contract which affect the shareholder in a special way, such as the denial of a right conferred on a member by way of pre-emption or otherwise to acquire the shares of another member.112 Rather, the Courts have allowed personal actions where it might be said that only a procedural irregularity, such as an irregular notice of meeting,113 is involved. As pointed out elsewhere,114 the confusion in the cases becomes acute when it is considered that a shareholder is entitled to bring a personal action where his voting right is wrongfully excluded115 but not where his demand for a poll is wrongfully refused.116 It is suggested by the writer that the present s.78(l) does nothing to allay this confusion. The rule in Foss v. Harbottle is not expressly dealt with. It has been suggested that the deemed statutory contract between the company and the 'officers' of the company 'will make it easier for minority shareholders to seek enforcement of directors obligations and will overcome to a certain extent the decision in Foss v. Harbottle . . .\117 If a director breaches a provision in the articles, such as the prohibition against voting at board level with respect to a contract in which he has an interest,118 then it will be the company that will have to institute an action against the director.119 Again, where the breach in articles perpetrated by the director relates to the passing of a resolution at a general meeting of the company, such that the company is also put in breach of the statutory contract with its shareholders, then it will still be the company that will have to institute an action against the directors unless it can be shown that the individual shareholder has a personal right of action whereupon the company will be joined as a defendant in the action. It may be noted that earlier drafts of s.7$(l) of the 1985 Amending Legislation also purported to create a statutory contract between each member and each officer but this was deleted from the final legislation upon the basis that it was an inappropriate method of safeguarding members' rights.120 No doubt it was feared that such a provision could cause a multiplicity of actions by members against officers particularly in listed corporations. By the same token, it may be that when an 'officer' seeks to enforce his rights under the 109. Baillie v. Oriental Telephone & Electric Co. [ 1915] 1 Ch. 503; MacConnell v. E. Prill and Co. Ltd [ 1916] 2 Ch. 57; Edwards v. Halliwell supra n.94. The right to bring a personal action is not restricted to those cases where the majority is insufficient. See Smith, supra n.98 at 156. 110. See for example Wood v. Odessa Waterworks Co. supra n.28; Mosely v. Koffyfontein Mines Ltd [ 1911 ] 1 Ch. 73. 111. Pennington, supra n.34 at 727. 112. Borland Trustee v. Steel Bros. & Co. Ltd [ 1901 ] 1 Ch. 279; Ray field v. Hands supra n.33; Grant v. John Grant & Sons Pty Ltd{ 1950) 82 C.L.R. 1 at 29. 113. Kaye v. Croydon Tramway [1898] 1 Ch. 358. 114. Smith, supra n.99 at 151. 115. Pender v. Lushington supra n.24. 116. MacDougall v. Gardiner supra n.101. 117. R. Baxt, Supplement to An Introduction to Company Law, (1986) at 8. 118. Eg. Art. 71, Table A. 119. Grant v. U.K. Switchback Railways (1888) 40 Ch.D. 135. 120. Companies and Securities Legislation (Miscellaneous Amendments) Bill 1985 2nd Exposure Draft - Explanatory Memorandum. Australian Company Law and Practice, at 90-070. THE LEGAL EFFECT OF THE MEMORANDUM 59 standi requirement. If it is probable that the breach is one that would be ratifiable by a majority of the company in general meeting then this should be a matter which is relevant to the Court's overall discretion in granting an injunction. Further, the Court would not be prevented from adjourning the proceedings and remitting the matter to the company in general meeting in order to ascertain its wishes once a breach has been proved. In any event, it may be that in the case of many companies the question is an academic one when the scope of s.574 is considered. The scope of the section is not as yet entirely clear. However, s. 574( 1) applies where there is a contravention of the Code whether a person commits an offence under the Code or not. Thus, in Broken Hill Pty Co. Ltd v. Bell Resources Ltdm it was found that, since Bell Resources Ltd had not complied with s.96(l) of the Code because it issued an application for shares to the public without attaching a registered prospectus, there was a contravention of the Code within the meaning of s.574(l). Section 574(2) applies where a person fails to do an act or thing that he is required by the Code to do. It has already been noted that under s.68(6)(f), a contravention of s.68(l) or s.68(2) may be relied upon in an application for an injunction under s.574 to restrain the company from entering into an agreement. When these provisions are compared with the terms of s. 7 8(1) it is very difficult to argue that a breach of the articles 'constitutes a contravention of the Code' or that when a party to the statutory contract refuses or fails to comply with the articles that 'he refuses or fails to do an act or thing that he is required by the Code to do.'137 The terminology of s.78(l) does not lend itself to such arguments. Each of the parties to the statutory contract simply 'agrees to observe and perform the provisions of the memorandum and articles - so far as those provisions are applicable to that person'. There is no indication that a breach of the articles 'constitutes a contravention of the Code' for the purposes of s. 574(1). Further, s.78(l) does not directly require a party to the statutory contract to do an act for the purposes of s.574(2).138 Perhaps s.574 may be relied upon where the duties and obligations imposed upon a company and its relevant 'officers' under the Companies Code are duplicated in the articles of associaton.139 Conclusion The new s.78(l) has clarified the position in relation to the identity of the parties to the statutory contract created by the section. It is arguable that the language of the new provision may be construed such that a member may enforce the statutory contract even though this may have the effect of indirectly enforcing 'outsider rights'. However, upon a consideration of the explanatory memorandum relating to the provision, it is thought that the better view is that the Hickman principle will continue to be applied by the Courts and 'outsider rights' will not be enforceable. With the introduction of s.78(l)(b) an 'officer', as defined in s.78(5), will no longer be considered an outsider. This provision would now provide a sound legal explanation for those cases in which the Courts have allowed a director, suing as shareholder, to commence a personal action to ensure that the company's * organs are properly constituted. Nevertheless, having regard to the explanatory memorandum, it is thought that directors also will only be entitled to enforce those rights which affect them in their capacity as directors and not in some other capacity. The new provision does not attempt to reduce the confusion in the case law relating to 136. Supra n.126. 137. Callaway, supra n. 131 at 117. 138. Ibid. 139. Ibid. 60 QLD. INSTITUTE OF TECHNOLOGY LAW JOURNAL the effect of the rule in Foss v. Harbottle upon the enforcement of the statutory contract by an individual member. Although s.574 of the Companies Code may prove in the future to be an important exception to the rule in Foss v. Harbottle, it is doubtful that it will be of much assistance in the enforcement of the statutory contract. Even if a wide interpretation be given to the locus standi requirement, such that an individual shareholder would be a 'person whose interests are affected' in the case of a breach of his company's articles, it is thought that the language of s. 7 8(1) does not lend itself to the enforcement of the statutory contract through the mechanism of s.574. Notwithstanding the deficiencies created by the rule in Foss v. Harbottle, the statutory contract will remain an important remedy to an individual member particularly in those cases where it is accepted by the Courts that the irregularity under the statutory contract is one in which the member may institute a personal action. Further, the statutory contract will continue to be relevant to a company where it seeks to institute proceedings against a member in order to enforce a pecuniary liability.140 140. Ford, (1986) supra n.73 at 48.