Articles of Association: An essential document for the formation of UK Companies

17 Oct

At the time of the formation of a company, it is a requirement to design two documents. These two documents set the basis for the company’s law. Hence, the law that company has to follow includes these two documents, namely, memorandum of association and articles of association or the constitution. Apart from these, every company has to follow same default set of rules, termed as Companies Act. The regulations of a company may not be restricted to these legislations. There may be different acts introduced time to time that may bring changes in the laws of any company. Such as Partnerships Act, Stock Transfer Act, Financial Services Act 1986. However, the concern of this article is to discuss some former and current rulings regarding Articles of Association.

Need of Articles of Association

According to Companies Act 2006 subsection 7ff, a company cannot be incorporated unless two documents are devised, that are memorandum of association and articles of association. After the authentication of memorandum, certain other documents and the memorandum have to be submitted to the Registrar per subsection 9ff of this act, if there are no articles of association for a company, the default Model Articles will be submitted as a replacement per Section 13 of Companies Act 2006. Hence, whether the company to be registered is unlimited, public, private or the entrepreneur intends to open ltd company in UK, the articles of association will have to be incorporated to register with companies house UK and for the operation of company.

Company’s Constitution according to Companies Act 2006

The following provisions in Companies Act 2006 discuss about the articles of association:

  • A company’s constitution may be presented in the form of articles of association as per Section 17 of this act.

It is mandatory for every company to have its articles. They may be either of the following:

  • Section 9(5) part 5 of this act states that the articles can be registered by the company itself during its incorporation.
  • Whereas, in the case of unregistered articles of association, the default Model Articles will apply for a limited company, as mentioned in Section 20 of Companies Act 2006. If the
  • Articles are registered, they should not modify or exclude Model Articles.

Removal of Objectives from the memorandum

It was a common practice in past and was in fact suggested in the Companies Act 1985 to include the objectives of a company in its memorandum of association. The objectives included the reasons for the formation of any particular company. For instance, a company may be formed for any social work, research and development, running schools etc. The reason for introducing objectives was to keep the members aware about the nature of activities being conducted by the company. Moreover, it also restricted the use of Director’s authorities for any out of bound activity. However, any activity outside the limits of objectives was considered void. This was beneficial for the company, as it would help it maintain the focus but at the same time detrimental to the company and third parties. For instance, many beneficial contracts would be termed as out of context with respect to the goals of a particular company.

However, in the 2006 version of Companies Act, this restriction of incorporating the objectives was lifted.

  • Section 31(1) of Companies Act 2006 stated that it is not a compulsion for the company to restrict its objectives. It may have unbounded objectives unless the articles demand for it.
  • Section 31(2) of the same act requires any restriction on the objectives to be mentioned in the articles of association of the company.

Constitution: The Binding Force of a Company

A constitution of any company plays the role of a binding force. The reason is that Section 33 of Companies Act 2006 entitles a constitution to restrict the company and the members in a way that it seems the company and every member has signed agreements separately to follow the provisions.

Former Provisions Regarding Articles of Association

Companies Act 1985 prescribes regulations for articles of association. Most of the Sections of 1985 Act have been either replaced or restated by the latest version of Companies Act. However, this Section just takes into consideration the former rulings on company’s constitution that were mentioned in 1985 Act.

Regulations by Articles for the Company

Section 7 of Companies Act 1985 is devoted for the description of articles of association. It provides separate rulings for a set up limited company companies house and unlimited companies.

  • Whether it is for a company allowing limited shares or a company having a limited guarantee or an unlimited company, the articles of association should be registered along with the registration of memorandum. The subscribers should sign the articles to the memorandum. Moreover, the articles should prescribe terms and conditions for the company.
  • If the company to be registered intends to be an unlimited company and have a share capital, the intended value of share capital of the company must be mentioned in the articles.
  • The formation of articles should be as such that they should be written in the form of paragraphs and their numbering should be done in a consecutive manner. The articles must be authenticated via the signatures of all the persons who subscribed into the memorandum. Moreover, there should be at least one witness present who may attest the signature. Lastly, the articles should be in a printed form.

Tables for Articles of Association

Different tables are suitable for the Articles of Association of various types of companies. Hence, any type of formation of UK company can incorporate the tables that are specifically designed for that type of company. Section 8 of Companies Act discusses about Table A, C, D and E.

  • Table A provides a framework for the regulations of a company. For the formation of articles, either whole of the table or some part of it may be utilised. The secretary of state provided with rules for the creation of Table A.
  • For a company that is limited by shares, if either of the two holds:
  • The articles are unregistered
  • The articles are registered but keep the table A unmodified or included
  • The Table A which may be up to date and in force will have the same effect in the articles of a company as if the articles have undergone fair registration in that table’s form.
  • If any alterations are made in Table A, as a result to this Section’s rulings, the company whose registration was done before the change came in to force, remains unaffected by the change.
  • For the case of a company that has a limited guarantee and no share capital or a company having limited guarantee and a share capital or a company that is unlimited and owns share capital, either Table, C, D or E may be followed as suggested by the Secretary of State to decide the form of the articles of association. If the form cannot completely follow any of these tables, it should be made as similar to the tables as it can be.
  • If a resolution of any House of Parliament is passed for the annulment of any of the provisions of this Section, it can be pursued by subjecting the provisions to nullification via statutory instrument.

Section 8-A of Companies Act 1985

  • In case of a partnership company whose shares are limited and where the shares may be held by employees themselves or on behalf of employees to a large extent, the Secretary of state may suggest the regulations in table G to provide adequate articles of association for the company.
  • To open ltd company in UK the ruling is that for the articles of association of a company owning limited amount of shares, the Table G can either be fully adopted or some portion of it may be incorporated.
  • Any changes made in Table G will only affect the companies that register after the changes become effective.
  • For the annulment of any of the regulations provided by this Section, the same procedure will be followed as mentioned in Section 8 for Table C, D or E.

A point to notice is that Section 8-A may be inserted only after the enforcement of Section 128 of Companies Act 1989.

Special Resolution for the amendment of articles

The Section followed by Section 8-A is Section 9 of Companies Act 1985. It states about the process of alteration in articles.

  • The alteration in articles may be done by the passage of a special resolution. Moreover, any conditions regarding this procedure mentioned in the memorandum or Companies Act 1985 should be observed.
  • Any changes brought in the articles after following the conditions of this act, are as valid as any regular article. The altered articles may further be altered via the same procedure of special resolution.

Power of Articles

Section 14 of Companies Act 1985 discusses about how effective a company’s constitution may be in governing the operations of the company.

  • As in Section 33 of Companies Act 2006, this Section also entitles a constitution along with the memorandum of the company to force all the members to abide by the provisions as if each of them had signed a separate agreement to follow the regulations.
  • If any member has to pay some amount of money to the company under the rules of constitution or memorandum, it may be considered as a debt to payed by the member to the company.

Regulations given by the memorandum that could also be included in the articles

The rulings for conditions that may be given by memorandum as well as articles are mentioned in Section 17 of Companies Act 1985. They are as follows:

  • All the conditions that could be a part of articles of association but are a part of the memorandum can be subjected to changes via special resolution only. However, if an application is passed to cancel any alteration, the change introduced in the memorandum will remain void as long as the court does not allow for the change to become effective.
  • However, this Section is inapplicable over clauses which are protected from any kind of alteration by the memorandum itself or where the changes in rights special to any class are not allowed by the memorandum.

Changing the articles that are to be registered

Section 18 of the Companies Act 1985 mentions the rules to be followed after the amendment in articles or memorandum.

  • A copy in printed form of the Act via which the alteration is made must be submitted to the Registrar within the next 15 days of enforcement of that alteration.
  • A printed form of the altered articles or memorandum must also be sent to the Registrar, if the company is obliged to send any document other than the special resolution, proving the change brought in the articles or memorandum.
  • If this Section is not followed, the person not following it will be fined.

These were some of the regulations about articles of association that the Companies Act 1985 provided for. However, the 1985 and 1989 Acts have been altered and brought into almost a new form that is the Companies Act 2006. Hence, the provisions regarding articles may differ for the latest version of Companies Act. The articles of association are the constitution of a company. And govern the internal operation of any company. These articles along with the memorandum should be submitted to the Registrar for the registration of a company. The documents register with companies house UK and after the satisfaction of Registrar regarding the completeness of documents, the company is given a certificate of incorporation per Section 14 and 15 of Companies Act 2006.

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