Division of Power in a UK Company Incorporation via Articles of Association of a Company

26 Nov

In order to understand how to open a company in UK and run business through it, the role of major organs of a company must be understand. A company generally consists of two major organs namely, the members and the directors. The division of their powers is determined by the Companies Act and the constitution of the company. Starting a company in England requires the registration of the constitution and the memorandum of a company signed by the subscribers that later become the members of the company. This article discusses the role of constitution on governing the division of powers of UK company incorporation and the limitations of the constitution.

Articles of Association of a Company

At the time of registration of a company, it is required by the company to submit two documents to the registrar. One of them is the memorandum of association and the other is the articles of association. At the time of starting a company in England the registrar requires the submission of two documents and if they are complete and as per the specifications, the company gets register. These two documents govern collectively the inner and outer affairs of a company. Articles of association are also known as the constitution of the company.

Division of Power via Articles of Association

The company articles decide the distribution of power between the members and the directors of a company. There are provisions given by the Companies Act 2006, governing the distribution of power to some extent. The Model Articles regarding the private companies belonging to 1985 and 2006 versions of Companies Acts provide an illustration of the way a company should generally divide its power. If a company has not registered its articles of association, the Model Articles will be implemented on the company as default, as stated in Section 20 of Companies Act 2006.

Articles of Association as per Companies Act 1985

The Companies Act 1985 defines the articles of association in its Section 7 as:

  • The companies that are limited by shares or guarantee or have an unlimited liability, may have to register the articles of association along with the memorandum that should be signed by the persons who have subscribed to the memorandum and the articles.
  • If the company is unlimited and has a share capital, the amount of the share capital must be mentioned in the articles that has been proposed by the company for registration.
  • The articles must be of the following form:
  • They must be in a printed version.
  • The articles must be arranged in paragraphs and the paragraphs should be continuously numbered.
  • The articles should be signed by those who have subscribed to the members and the signatures should be attested by at least one person who is present at the time of signature as a witness.

Private Companies having Limited Shares and Model Articles

There are specific Model Articles for setting up a limited company UK. As mentioned above, the Model Articles will apply on a company that has not registered its articles of association. Hence, the Model Articles give a general view about the division of power between the members and the shareholders.

General Powers given to the Directors

The directors are the managers of the business of the company and may be subjected to the articles of association. They are allowed to exercise all the company’s authorities for the management of the company.

Reserve authorities given to the Shareholders

The directors can be directed by the shareholders to take or stop from taking any specific action. This can be done via the passage of special resolution. If the directors have already taken any action before the passage of any special resolution, passing the resolution after it will not invalidate the action of the director.

Amendments in Tables A to F

It is mentioned in the Companies (Tables A-F) (Amendments) Regulations regarding the Table A that:

  • In relation the clauses of the Act as well as to the constitution and memorandum and any ideas accepted via the passage of special resolution, the directors of the company shall manage the company’s business and may utilise all the company’s authorities. No change brought in the memorandum or the constitution and any relevant order will be enough to nullify any action that has been taken prior by the director and would have remained valid if no such order had been given or the articles or the memorandum would not have been changed in that manner. The authority given by this regulation shall not be subjected to any limitations by any authority specially bestowed upon the directors via the articles of association and any directors’ meeting which is held in the presence of a quorum, is allowed to make use of all the authorities that can be exercised by the directors.

Rulings regarding the Interpretation of Articles

If the articles are responsible for the distribution of the powers between the members and the directors, it becomes necessary to interpret the way a constitution has distributed the powers. There are some traditional rules that help in governing the interpretation of the contract and can be used to interpret the articles because the constitution of a company is actually a form of contract between the members and their company. However, a problem is that the articles are not like any general contract, in fact they are quite unusual in nature and hence there are certain limitations that are depicted by different cases. The limitations are mentioned below:

Verdict of Court to Rectify the Articles

There lies no jurisdiction with the court that is related to the rectification of the articles of association. For further elaboration, study the case of Scott v Frank.

Scott v Frank

The facts of the case can be noted from the judgement. It was held by Luxmoore LJ that:

  • The point to ponder is that, the claimants allowed to amend the articles in a way that they are claiming to? It was stated by Bennett J at first that he was ready to order that the registered memorandum and the articles were not according to the will of the three brothers who were also the sole subscribers of the articles and the memorandum. Also, since the death of Frank Stanley Scott, they had become the only shareholders of the company. However, he held that the court did not have any legal power to amend the articles of association even when it was proved that the articles were in accordance to the will of the subscribers that they had at the time of the signature. We assent to the decision given by Bennett J and believe that no amendment can be ordered by the court upon any appeal in the memorandum and the articles of a company that has been properly incorporated under the statues.

No terms that have been generated from external situations can be added to the articles as a supplement. The case study of Bratton Seymour presents an elaboration to this limitation.

Bratton Seymour

The intention for setting up the company was that it would manage a development commercially, that consisted of some apartments. The owners of the apartments held shares in that company. The question presented in front of the court was that could it be allowed to make an addition in the articles that allowed to hold the members responsible for making some additional contribution for the maintenance of swimming pool, garden and such other facilities? It was held by the Court of Appeal that this could not be done.

Steyn LJ held:

  • It is provided in the 1st clause of the 14th Section of Companies Act 1985 that the articles along with the memorandum bind the members and the company to an extent that they would have been bound to, if each of them had signed and sealed the documents separately. In relation to this section, the articles transform into an agreement between the company and the members. But, it is a contract under the statute and has unusual features. The binding force of the contract comes from the clauses of the statute and not from any bargaining done between the parties.
  • It binds only to an extent that affects the rights and responsibilities of the members and the company when they act in their capacities. If there any provisions that confer any outsider’s rights and responsibilities, then such provisions will not be considered as a part of the contract between the members and their company, even when the outsider turnouts to be a member by chance. 
  • In the same manner, if the provisions cannot be used to truly refer to the rights and restrictions of the members then the articles will not work properly as a contract. Amendments can be brought in the contract via the passage of a special resolution, even when not all of the parties involved in the contract agree to it. It cannot be nullified or revised because of the reasons including common law mistake, misrepresentation, excessive influence, equity’s mistake etc. It cannot be subjected to any rectification on the basis of mistake.
  • As far as the present case is concerned, it has been questioned that can an additional term be implied that has been derived from the external situation and not from the language of the articles, and allows for contribution of the members in the amenities’ upkeep. Rather the question is that can it be done possibly in any similar circumstances?
  • I agree that the Black letter approach should not be embraced by the law. It is fair enough to imply a term that has been derived from the language of the articles itself. However, implication of a term that has been derived from external affairs is a different matter.
  • The company claims to implement a condition that has its derivation from an external matter, and not the articles of association. I believe, this implication cannot be done successfully in case of articles of association. Even it was allowed to happen, it would have required that the different terms to be introduced were possible between the company and its different subscribers.
  • As a company or any of its member cannot pursue any claim against the statutory agreement on the basis of misrepresentation, excessive influence, fault etc. and are also not allowed to claim for any rectification, in the same manner the company or any of its member is not allowed to claim to add or exclude any clause from the articles of association that has its derivation from the external affairs. If the permission is given for the current case, it will become equally allowable over all the cases of the company law. As a result, it would be quite prejudiced for the third parties, who are the shareholders and are authorised to depend upon the articles of association and rely upon them as they were registered. Notwithstanding the argument given by Mr. Asprey, I am of the view that the term cannot be implied successfully merely on this basis.

Similar verdicts were given by Dillon LJ and Sir Christopher Slade.

The articles are important in the process of setting up a limited company UK. Articles of a company clearly mentions how the division of power be made for the directors and members of a company and no changes can be brought into the articles without the consent of the members.

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