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ACCA Applied Skills · Corporate and Business Law (Global) · The formation and constitution of a company

Kestrel Ltd was incorporated with articles that state the directors may allot shares only after approval by the board. A shareholder, Amira, argues that the articles form a binding agreement between the company and its members. Which statement best describes the contractual effect of a company's articles of association?

The articles bind the company and its members in their capacity as members, as though each had agreed to them. They are not a contract with outsiders such as suppliers, and they need no court approval to take effect.

  1. AThey bind the company and its members in their capacity as members, as if each had agreed to themCorrect
  2. BThey bind only the directors and not the shareholders
  3. CThey bind the company and any outsider who deals with it, such as suppliers
  4. DThey have no legal effect until approved by the court

Explanation

The articles operate as a statutory contract between the company and its members, and between members themselves, in respect of membership rights. They do not bind outsiders as such, and no court approval is needed. Option B is wrong because members are bound too.

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