Elaborate the Extend to Which the S.23 Contract Binds the Company, Its Members and Its Officers

Topics: Contract, Breach of contract, Arbitration Pages: 7 (1897 words) Published: November 18, 2010

“This report is to elaborate the Company Ordinance - Cap 32 s23. contract binds the company, its members and its officers by looking at the difference cases.

Background –

By signing names to the memorandum of association or articles of association, members are permitted following the registration requirements of the Companies Ordinance to form an incorporate company (s4). Founder members are formally considered to become the company members on their day of registration in Section 28.

Anyone who buys or owns the shares in the company, either from a current member or from the company, would become a member of the company effective when both parties signed the contract; in addition, his name will be entered in the register of member (s 28(2)). If a member pays the prescribed fee with a maximum of $5, the company is necessary to send him a copy of memorandum of association and articles of association (s26).

The memorandum of association and articles of association take effect on binding the company and existing members together once MOA and AOA are registered. There is a contract under seal between the company and the members; also between members and members and is deemed to contain covenants on the part of the company and the members to observe all their terms (s 23(1)).

In Borland’s Trustee v Steel Bros & Co Ltd (1901) UK, the company’s articles states that the required transfer of shares should indicate to anyone at a fair price on the occurrence of certain events, including bankruptcy. On Borland’s bankruptcy, the company gave notice to his trustee requiring him to transfer in accordance with the articles. The trustee argued that this provision in the articles was void.

It was held that the article was true and enforceable by law. Farwell J claimed: ‘A share is the interest of the shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with [s 23 of the Companies Ordinance]. The contract is one of the original incidents of the share.’

What is s23 –
Based on legislation.gov.hk, section 23 (Cap 32) states the below.

General Provisions with respect to Memorandum and Articles
(1)Subject to the provision of this Ordinance, the memorandum and articles shall, when registered, have effect as a contract under seal – a.between the company and each member; and
b.between a member and each member,
and shall be deemed to contain covenants on the part of the company and of each member to observe all the provisions of the memorandum and articles. (Replaced 28 of 2003 s.9)

(1A) Without limiting the generality of subsection 1, the memorandum and articles shall, when registered be enforceable by the company against each member and by a member against the company and against each other member. (Added 28 of 2003 s.9)

(2)All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company and be of the nature of a specialty debt. “

Section 23 actually consists of two types of contracts:

A contract between a company and each member; and

A contract between each member and each other member, a contract among the members themselves.

The contract between a company and a member

The contract between a company and a member can be demonstrated by members sue the company to compel the terms of the articles.

In Wood v Odessa Water Works (1889) UK, the articles states that the company, Odessa Water Works, to declare a dividend ‘to be paid in cash’ to the shareholders. Also the company passed a resolution aiming to pay no dividend, in replace, to give the shareholders debenture bonds bearing interest. Wood, a shareholder, sought an order to detain the company from acting on the resolutions.

In was held that the proposal was...
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