A Company's Constitution - Court Is Willing To Imply Terms

A company's articles of association ("articles") are essentially a contract between a company and its members. The recent Court of Appeal case of Cream Holdings Ltd v Davenport shows that, in certain circumstances, the court is willing to imply terms into this contract where it deems necessary.

The Facts

On leaving the company, a director was required, in terms of the articles, to transfer his shares at a value determined by a third party accountant. The company sought to appoint a third party accountant, however, the director alleged that there was an absence of full financial disclosure by the company and refused to sign the accountant's letter of engagement. The company then sought a court declarator to confirm the engagement terms so as to progress matters.

The Decision

The court implied a term into the company's articles of association that the transferor of shares (i.e. the director) would co-operate with the appointment of an accountant for share valuation, and not unreasonably refuse to agree to terms of the accountant's engagement, if reasonable. In arriving at its decision, the court considered whether the company owed any obligation to the director in providing full financial disclosure prior to agreement on the terms of engagement. As there was no such express obligation in the articles, it was held that this was not the case. Taking into consideration the principle that "a contract should better function...