At the time of register company in London or anywhere in UK, two documents are generally required to be submitted to the registrar. A company’s actions are governed by these two documents. The first one is memorandum of association and the second is articles of association. The members of an England formation company are authorised to change the articles of association. However, there may be situations when companies sign contracts that prohibit changes in some of the articles of a company. This article discusses about the situations where these rules of contracts cannot be implemented.
Altering the Articles of the Company
Section 21 of Companies Act 2006 states the rulings about making amendments in the articles of association of a company. Section 21 states that, the articles of association can be amended by the passage of special resolution, as long as the articles have not been entrenched as per Section 22. It is by the virtue of Section 22 that some of the articles have specifically been made changeable only when rules stricter than required for special resolution are followed. It is an interesting point to notice that the second clause of Section 22 has not been brought into force yet.
Under Section 28(2) of Companies Act 2006, if the clause stating about the entrenchment was incorporated in the old memorandum of the company, it will be considered, under the new legislation, as a part of the articles of the company. According to Section 23 and 13, the notice mentioning about any change, exclusion or existence of any entrenched provision must be shared with companies house set up.
Section 25 of Companies Act 2006, maintains the principle that any member is not obligated by any change made in the provisions of articles after the member acquires the membership if that change is regarding bringing an increment in the liability to the company or making it a requirement to hold more shares in the company. However, a member may be bound by it if he/she gives a consent in the written form to this alteration.
Before the enforcement of Companies Act 2006, the companies were required to keep both, the memorandum and the articles of association. Different regulations of the statute governed each of the two documents. Initially, when the Joint Stock Companies Act 1856 proposed the memorandum for the first time, no changes could be brought in its clauses, excluding the clause of increasing the capital. Then, there came a time, when the 1985 version of Companies Act allowed to bring changes in the clauses of memorandum except for fixing the domicile of the company by using a proper method. Moreover, the name of the company could also be altered under the Section 28 of Companies Act 2006. Some other changes were allowed regarding a company. It included changing the objective clauses under Section 4 of Companies Act 1985, changing the status of the company according to Part 2 of the same act and the capital provisions as per subsections 121, 125 and 135 of Companies Act 1985.
Alteration of Objectives of the Company
A memorandum may also include the objectives for forming the company. These objectives can be subjected to a change via a special resolution, and court would only interfere in the matter if an application of objection was made within 21 days by persons holding at least 15% of share capital of any class that had been issued. Following the application, the court had the authority to permit the change made or prevent that from happening. In past, in the cases that involved the use of this authority of the court per 1985 version of Companies Act and past methods, the concerned bodies were non-commercial organisations. For instance, the cases of Re Cyclists’ Touring Club and Re Hampstead.
Hence, from the history, it can be observed that alteration of the articles has always been permitted via special resolutions by the Acts. There was no statutory binding, except for the Section 125 of Companies Act 1985, that stated about the variation of class rights and their protection. The task left for the judges is to formulate rules that are more particular in controlling the authority conferred to members in majority to bring any change in the articles. Unfortunately, the emerging rules are vague. The courts depend more on phrases like sincerity towards the benefits of the whole company, but such phrases do not clarify the intention of the decisions being taken, rather they conceal them. The difficult contrast of the property right of members and the test for “interests of the company”, is not considered in the cases that have taken place so far. Otherwise the rulings given by the courts would have given rise to more apprehensible principles. An exception is the case of Peter’s American Delicacy.
Contractual Prohibitions of Altering Articles
If there is any contract signed that states about prohibiting any changes in the articles of association of a company, then it cannot be brought in to force via an injunction. For elaboration, consider the case of Punt v Symons.
Punt v Symons
The defendant company’s articles 95 and 97 authorised GC Symons, as an administering director to make appointments of the directors or remove them. Moreover, it was also stated in the articles that this authority would be given to his executors after his demise. In another contract, it was agreed by the company to not to alter the articles relevant to the purchase of the business of Symons. After the demise of Symons, there was some rivalry between the executors and the directors, leading to a proposition given by the directors to bring a change the relevant articles via a special resolution. An injunction was pursued by the executors.
It was held by Byrne J that:
He then referred to the case of Allen v Gold, as well as to a decision that was unreported in the case of Re Ladies Dress, in which there was a contract signed to refrain from altering the articles of the company, and it was not brought into force. He then continued:
Inferences from this case study
The judgement given by Lord Porter in the case of Southern Foundries gives support to the judgement given in the previous case study. Hence, it should be preferred. A contrary verdict was given in the case of British Murac by Sargant J, which mistakenly had its basis on the view that the case of Punt was overridden by the case of Baily v British Equitable.
Exception to the Contractual Prohibition of Altering Articles
There are exceptional cases where the prohibition of changing the articles can be implemented. Lord Porter pondered over this matter and stated that there may be scenarios where a company acts in a way according to its articles that results in a violation of the contract. In such scenarios an injunction must be granted by the court. Thus the court may refrain the company from acting according to its changed articles.
Walker v London
According to Byrne J, a well-settled principle is that the right of altering the articles of a company cannot be undermined by the company by a provision of the company’s articles. The same was mentioned by Jessel MR in the case of Walker v London who stated that any article of the company that prohibits bringing any change in the company’s specific articles will not be effective.
This rule given by Jessel MR and Byrne J, is a broader extension of the principle that a company is not ratified to bargain upon the right of using powers that are given to the company by the statute. For a company formation UK the rules can be expanded on some other situations as well. However, the extent of such a rule, if the rule existed, remained a topic of the debate going on after the verdict given for the case of Russell v Northern. There are clear verdicts regarding the rulings that a company is not permitted to sign any contract that binds the company for not altering the articles, also, it is not allowed to contract for not altering its capital as in the cases of Punt and Russell respectively. This ruling can also be extended in scenarios where it is not allowed to sign any contract that provides for taking the company into liquidation or sign a petition for winding it up.
Binding a Company for Commercial Reasons
Despite this ruling, there might arise certain situations of good commercial value, that may require the company to not to act on some these rules. For example, if a bank lends money to a company, it may do so upon a condition that the company does not reduce its capital. And this has been implemented practically over years. So after the verdict of Russell, the Parliament has been pressurised to bring a change in this ruling and allow the company to bind itself in some specific situations via contractual undertakings. However, the notion that things that cannot be carried out directly can be done in many indirect manners has weakened the existence of this general principle. As an example, take a shareholder’s agreement which can be used by linking the class rights to some shares, as in the case of Cumbrian Newspapers. Also, this can be done by using “weighted” voting rights as in the case of Bushell v Faith. In the case bank lending money to the company, the bank can put a condition that the money has to be repaid immediately when the company calls a meeting to discuss the proposal of a resolution about reducing the capital.
As a final analysis, it should be observed that all the restrictions are applicable on a company that restricts the expanse of its rights under the statute. As the shareholders are allowed to sign shareholder agreements preventing them from bringing any changes to the articles of association or from doing any relevant act. But the question that arises is that whether such an agreement will be brought into force or not or will it just lead to the consequences of violation.
When you are to register company in London or anywhere in UK, the articles will have to be designed. Hence the articles of association should be designed carefully, so that least number of conflicts arise later. Contractual bindings cannot affect the impact of articles of company formation UK generally. However, this article has outlined matters that may be an exception to this general rule.