1940 (4) TMI 16 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles

Summary

Issues Involved:
1. Validity and implications of the managing director's appointment for a fixed term.
2. Impact of the alteration of articles of association on the managing director's tenure.
3. Liability of the company and Federated Foundries for the removal of the managing director.

Analysis:

1. Validity and Implications of the Managing Director's Appointment for a Fixed Term:
The respondent was appointed as managing director of Southern for a term of ten years starting from December 1, 1933. The agreement stipulated that he would perform duties assigned by the directors and be paid a salary that increased annually. The agreement also included clauses that addressed the termination of his tenure in specific circumstances, such as the winding-up of the company. The court recognized that the appointment was for a fixed term, and the respondent could not be dismissed without just cause during this period. The articles of association, specifically articles 89, 90, and 91, provided the framework for the respondent's role and the conditions under which his directorship could be terminated. However, the court concluded that the contract did provide for a ten-year term, and the respondent could not be dismissed without just cause, except under specific conditions outlined in the articles.

2. Impact of the Alteration of Articles of Association on the Managing Director's Tenure:
In 1936, Southern altered its articles of association as part of a merger with other companies, resulting in the adoption of new articles that included article 8, which allowed Federated Foundries to appoint and remove directors of Southern. The court examined whether this alteration constituted a breach of the respondent's contract. It was determined that while a company has the statutory right to alter its articles, such an alteration could still result in a breach of contract if it contravenes the terms of an existing agreement. The court emphasized that a company cannot break its contracts by altering its articles, and any such alteration must be made in good faith and for the benefit of the company. The court found that the alteration of the articles did not in itself constitute a breach of contract, but the subsequent removal of the respondent by Federated Foundries did.

3. Liability of the Company and Federated Foundries for the Removal of the Managing Director:
The respondent was removed from his directorship by an instrument executed by Federated Foundries, which resulted in the termination of his role as managing director. The court considered whether Southern was liable for this removal. It was argued that Federated Foundries acted independently and not as an agent of Southern. However, the court concluded that the removal was a direct consequence of the alteration of the articles, which Southern had enacted. The court held that Southern could not absolve itself of liability by delegating the power to remove directors to Federated Foundries. The removal was deemed a breach of the respondent's contract, and Southern was held liable for damages. The court also noted that if the removal had been for reasons specified in the original articles, such as bankruptcy or lunacy, it might not have constituted a breach. However, in this case, the removal was not based on any such grounds.

Conclusion:
The court ultimately found that Southern breached the respondent's contract by enabling his removal through the alteration of the articles of association and the subsequent action by Federated Foundries. The judgment affirmed the respondent's right to damages for wrongful dismissal, emphasizing that a company cannot evade its contractual obligations by altering its articles or delegating powers to a third party. The appeal was dismissed, and Southern was held liable for the breach of contract.