Section 32 of the Companies Act 1997 tells you who can sue on a constitution, and who cannot.
Section 32(1) — binding as a contract
Subject to this Act, the constitution of a company is binding as a contract between —
(a) the company and each shareholder; and
(b) each shareholder,
in accordance with its terms.
| Relationship | Bound by s 32(1)? |
|---|---|
| Company ↔ shareholder | Yes — paragraph (a). Either may enforce against the other |
| Shareholder ↔ shareholder | Yes — paragraph (b). A shareholder may enforce directly against another shareholder, without joining the company |
| Company ↔ director | Not by section 32. A director’s obligations come from the Act — particularly section 114, which requires directors not to act or agree to the company acting in a manner that contravenes the Act or the constitution |
| Company ↔ outsider | No. A supplier, employee or lender is not a party. And under section 20 an outsider is not deemed to know the contents of a constitution merely because it is registered |
| Company ↔ shareholder in another capacity | No. The contract binds a shareholder as a shareholder — not in a separate capacity as, say, a contractor to the company |
Shareholder-to-shareholder enforceability means that pre-emption clauses, compulsory transfer provisions and voting arrangements in the constitution can be enforced directly by one shareholder against another. A shareholder who tries to sell outside the pre-emption machinery can be restrained by the others without the company having to act.
That matters, because the company is controlled by the board, and the board may be aligned with the defaulting shareholder. See also section 142, under which a shareholder may obtain an injunction restraining the company from conduct contravening the constitution.
“In accordance with its terms”
The constitution is enforced as written. That has two consequences.
- Drafting matters. An obligation that is not expressed will not be implied merely because it seems fair. If shareholders intend a right of first refusal, a valuation mechanism, or a right to appoint a director, the constitution must say so.
- Only the terms bind. A course of dealing or an informal understanding among shareholders is not part of the constitution. If it is to be enforceable, it belongs in a shareholders’ agreement — or, where all shareholders concur, it may be given effect through section 89 unanimous assent.
Section 32(2) — inconsistency
The constitution of a company has no effect to the extent that it contravenes, or is inconsistent with, this Act or any other Act.
Three features are worth noting.
- “To the extent”. The clause is read down or severed; the rest of the constitution stands. An entire constitution is not invalidated by one bad clause.
- “Or any other Act”. The inconsistency test is not confined to the Companies Act. A constitution cannot cut across the Investment Promotion Act 1992, the Banks and Financial Institutions Act 2000, or sector licensing legislation.
- “No effect”. Not voidable — ineffective. A shareholder cannot sue on it, and a director cannot rely on it as authority.
Section 28 makes the same point positively: where a company has a constitution, the Act’s rights, powers, duties and obligations apply except to the extent that they are negated or modified, in accordance with this Act.
How a constitution is enforced in practice
| Route | Who may use it |
|---|---|
| Contract action under s 32(1) | The company against a shareholder; a shareholder against the company or another shareholder |
| Injunction — s 142 | A shareholder, director or entitled person, restraining conduct that contravenes the Act or the constitution |
| Derivative action — s 143 | A shareholder or director, with leave, suing in the company’s name |
| Personal action — ss 147, 149 | A shareholder, against a director or against the company, for breach of a duty owed to the shareholder |
| Actions to require action — ss 148, 150 | A shareholder, requiring a director or the company to act |
| Prejudiced shareholder — s 152 | A shareholder or former shareholder, where affairs are conducted in a manner oppressive, unfairly discriminatory or unfairly prejudicial |
| Court alteration — s 35 | A director or shareholder, where altering it by the ordinary procedure is not practicable |
The majority cannot simply amend away a minority’s rights. Under section 33(2) an alteration requires a special resolution and is expressly stated to be without limiting section 98 or section 152, but subject to section 55.
So an alteration that affects the rights attached to a class engages the interest group machinery in section 98 and the buy-out right in section 99; an alteration that is unfairly prejudicial engages section 152; and section 153 gives the Court power in relation to alterations. Section 83 adds that a shareholder cannot be required to acquire shares by an alteration made after they became a shareholder.
Sources
- Companies Act 1997 — ss 20, 28, 29, 32, 33, 35, 55, 83, 89, 98, 99, 114, 142, 143, 147–153
- Investment Promotion Act 1992
- Banks and Financial Institutions Act 2000
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.