Rayfield v Hands [1960] Ch 1

Facts

• Mr. Rayfield was a member of Tewkesbury and District Co-operative Society Limited, a small private company.
• The defendants were the directors of the company and also members.
• The articles of association contained a rule requiring any member wishing to transfer shares to notify the directors, who were then obligated to purchase those shares at a fair value.
• Mr. Rayfield wished to enforce this article, compelling the directors to buy his shares.
• The directors contended that the rule was not directly enforceable by one member against another, but only constituted an agreement between each member and the company.

Issues

1. Whether the articles of association can impose enforceable obligations between members directly, rather than only between members and the company.
2. Whether the directors were contractually bound to purchase Mr. Rayfield’s shares as required by the relevant article.

Decision

• The court held that the article in question created a contract not just between the company and its members but directly between the relevant members, specifically between Mr. Rayfield and the directors.
• Contextual factors such as the private and closely held nature of the company, limited membership, and clear wording of the article supported the finding of direct obligation between members.
• The directors were required to purchase Mr. Rayfield’s shares in accordance with the article.

Legal Principles

• Section 20 of the Companies Act 1948 (now section 33 of the Companies Act 2006) establishes that articles of association form a statutory contract binding the company and its members, and potentially among members inter se.
• The articles of a company may, in some circumstances, be enforceable directly between members if the text and company context suggest such an intention.
• Careful drafting of articles is essential, particularly in small private companies, to ensure clarity as to whom specific obligations attach.
• The enforceability of direct member obligations is more likely in closely held companies with a stable and limited membership.
• Later cases have regarded the facts of Rayfield v Hands as somewhat exceptional and cautioned about direct enforceability in larger or less close-knit companies.

Conclusion

Rayfield v Hands confirms that, in certain circumstances, a company’s articles of association can be directly enforceable between members and not just between company and member. The specific context of a private, closely held company and precise article wording were decisive. This case remains a key authority on the contractual effect of articles of association regarding enforceability among members themselves.