Alteration of Articles of Association for the benefit of UK Company Incorporation and Relevant Case Studies

04 Jan

Those who want to learn how to register a company in UK must know that a mandatory part at the time of create company UK is to prepare two documents. These documents are must for the company’s working. The two documents are memorandum and articles of the company. A company’s operations may be governed via its articles. The articles of association are also termed as the constitution of company. The articles can be subjected to change. Members of a company have this right to alter the articles of association. However, it should be noted that this change can only be brought via the passage of a special resolution.

Authentic use of Authority of Altering the Articles for the Benefit of Company

Any UK company incorporation can bring change in its articles by the consent of majority of its members i.e. via the passage of special resolution. Even if this authority is given by the statute to alter the articles, it should be preferably used with any authentic benefit of the whole company. Any change that is brought in this manner will be deemed valid and will have its impact on the rights of members. The members will remain bound by the alteration. Moreover, it may be possible that the alteration results in a violation of any contractual provision. For further elaboration, please go through the case study that is mentioned below. The case study specifies a situation where the security of company’s benefit led to an alteration in the articles regarding the allotment and transfer of shares and restrictions on them.

Allen v Gold

The 29th article of the company stated that, a right to keep the shares for which the amount had not been paid fully by any member who owed any loans to the company, was given to the company. The company changed this article by removing the condition that only those shares will be under the hold of company that were unpaid fully. So after the alteration the company had hold over all the shares, paid or unpaid, of persons who were under the debt of the company and only one person was influenced by the alteration. Zuccani was a member who died insolvent. He had paid all the amount on the shares when starting a company UK but after sometime he acquired some shares of the company that were not completely paid for. But he died without fully paying for the shares. The executors of Zuccani made a claim that the company could not acquire the shares that were fully paid by the virtue of the alteration. It was held by Kekewich J that the company was not authorised to impose its lien. However, the Court of Appeal reversed the verdict of Kekewich and validated the alteration.

It was held by Lindley MR that:

  • According to Companies Act 1862 Section 14, the articles of a company outline the regulations for a company and these articles bind the members. They are as effective as contract but the absolute nature of the contract cannot be specified easily.
  • Under the statute, it is allowed to a company to make any changes in these articles, and any provision of any act that is contradicting this right is invalid for the reason that the provision contradicts the statute. As in the case of Walker v London.
  • Therefore, the authority of altering the articles given to the company can only be subjected to limitations by statute and the terms of memorandum of that company. As per the wordings of section 50, any authority that is given should be made use of in a way, as all other powers are used, following the limitations of law and justice that are imposed on every power given to majorities and empowers them to restrict the minorities.
  • The exercise of the power should not only be in accordance to law but also genuinely for the purpose of benefitting the whole company and the power should not be used beyond its limits. These rules are always imposed. If these rules are followed, then there is apparently no reason to subject any power given by that section to any further restrictions. The transfer of shares and matters relevant to it are clearly subjected to the provisions of a company’s articles.
  • Generally, a company that is limited is given the right to have no lien on fully paid shares, bring changes in articles via a special resolution, and have a lien or limitation on shares of members that owe any debt towards the company.  
  • But again, the question that raises is that, can this be practised regarding the imposition of a lien or limit on a debt that was taken before the alteration of articles and still exists at the time of alteration. In my view, such an alteration that is made for the genuine advantage of the company, is allowed, and it will restrict the shareholders equally whether they are indebted or not to the company when the change is made in the articles.
  • Nevertheless, as depicted in the present case, it is not possible that the altered article remains inapplicable on specific shareholder who has paid fully for the shares. Even if that shareholder owns special authorities contrary to the company, they are not sufficient to cancel the passage of resolution for alteration of articles. But the special rights may save him from the operation of the articles that have been changed.
  • The articles can be cancelled by a special resolution, however, there should be signed a special agreement by the company embodying some of the articles. Later the question that will be raised is that, whether any of the articles that have been embodied, if changed, remains consistent or inconsistent with the deal made between the parties in the contract. The provisions of contract signed by company cannot be violated via the alteration of articles. But in situations where the matter is related to revocable articles, especially in contracts dealing with the members and their shares and the company, it should not be thought at any case that the contract comprises of articles that cannot be changed.
  • A situation arose in the case of Swabey v Port, where the member was exempted from the imposition of an article due to special rights. In this case, the directors were allowed to keep the fee that was earned by them under an article of the company, even after changing that article in a way that deprived the directors from the prior right given to them.
  • I believe that it is quite clear that any application regarding allotting the shares following the conditions of the company’s articles, cannot preclude the authority to bring any change in them or make effective any change on the shares that have been applied for. For the exclusion of any such altered articles from getting imposed on any specific shares, there should be a clear agreement stating this, certain situation should be proven which may allow the shareholders legally to be treated in a different manner than others.
  • The last question under consideration is that, if there exists any contract or any situation that exempts the shareholder from the imposition of altered articles. The executers of Zuccani were solely affected by the alteration made.  The altered article remains effective, on all the shareholder who have fully paid up on their shares. The directors cannot be accused as doing this in bad faith.
  • I conclude that the appeal made in respect to the judgement given by the judge, regarding the lien on shares, should be permitted.

Romer LJ gave a similar verdict whereas VaughanWilliams LJ disagreed with it.

It is important to understand about the matters concerning alteration of articles after knowing how to register a company in UK. Another case study is presented below. It elaborates the effect of an alteration brought in the articles of the company. It supports the fact that if any change is brought in the articles of a company especially for the benefit of the company, then the change in article will remain valid and effective.

Sidebottom v Kershaw

The company that was at defense had changed its articles by incorporating a clause that authorised the directors to buy-out the shares of any member who would be working in competition to the company, at a just price. This article was challenged by the minorities who were also plaintiffs and ran a business that was in competition with that company. However, their claim did not succeed.

It was held by Lord Sterndale MR that:

  • In my views, the question that should be considered is that were the directors taking the decision of buying up the shares held by competitors of the company bona fide the advantage of the whole company or not? Apparently, the decision was for the benefit of the company.
  • A person holding membership in its competitive company has a better opportunity to know what is happening in the company, so that he can run his own business with the help of this knowledge. Whilst if he was a non-member he would not have had a similar chance.
  • In small scale businesses, taking such a step may prove very helpful to the company. However, it is to be decided by someone who has a precise knowledge about the business and competition.  If the alteration is analysed broadly, then, it seems advantageous to the company on the whole as any knowledge gained by the competitor members of the company will help them in giving a better competition to the company.
  • The argument is that this action has been taken specifically against Mr. Bodden, and not in the favour of the company. I believe, if it was done for any spiteful goal against Mr. Bodden, then this argument was fair. However, the change in rule was a result of any circumstances that took place and made the directors think this way.
  • It was done because the status of Mr. Bodden made the directors realise the potential danger that the company had from members running competitive businesses, and that if the change was passed, it would be used against Mr. Bodden. However, the directors also kept in mind while devising the alteration that the potential danger of competition was not only from Mr. Bodden but could also arise from other members. Therefore, the directors passed this resolution to make the usage of this authority possible whenever it was required by the company.
  • Hence, I believe that the directors’ intention for bringing this change in the article was absolutely in the benefit of the company. and there is no doubt that the directors had passed this resolution in response to the realisation they made that keeping persons like Mr. Bodden who were competing with the company as well, was bad for the company.
  • For the above mentioned causes, I believe the article remains valid. And the appeal must be permitted.

Similar verdicts were delivered by Warrington LJ and Eve J.

Articles are the set of rules that govern the company’s conduct. However, it is important to know that the right to alter these articles is given to the members so that they may be able to keep themselves safe in situations where there is danger to the interests of company or to the members. Hence, it may become necessary to alter the articles that are originally made at the time of starting a company UK so, the situations can be handle in an effective way.

* The email will not be published on the website.