Process of Implication and Interpretation of Articles of Association in a Limited Company Formation UK


In the process to open a company in UK and compose the articles of association of a company, it may be possible that the intentions of author of the articles may differ from the expectations of the parties regarding the articles’ interpretation. The article deals with any such problems that may arise after limited company formation UK or any other form of company’s registration.

Articles of Association

Being an important document that governs the conduct of a company, it becomes equally important to correctly interpret the terms and conditions mentioned in any company’s articles. The correct interpretation will result in the correct implementation, resulting in least ambiguity in any action taken by the company. The articles of association are to be prepared at the time of register a business name UK and submitted to the registrar.

Making Amendments in the Articles

When it is required to bring a change in the articles, the interpretation of the amendment being made should be determined. However, in this process the courts may not take into consideration the situation which led to the need of alteration or the impact that may be caused by the alteration. Rather the court will add words to make the meaning of the article clearer and implement a condition which is in accordance with the meaning of the articles, when they are objectively considered in commercial setting. Let’s discuss the case study of Coroin Ltd.

Coroin Ltd.

The court had planned to assent for some background given extrinsically for the interpretation of those articles that were being questioned in the court. It was held by David Richards J that ‘it would not be real to make an interpretation of the articles while not considering the shareholders agreement and the background of devising that agreement. And neither would this contradict with the grounds given for the commonly exclusive ruling of taking into consideration the agreement of the shareholders and the background of that agreement’. The reason leading to the adaptation of this approach was that the articles had been devised following the shareholders’ agreement. Negotiations were done for the two documents and it was aimed that the documents would determine the matters between the persons who had initially invested as members of the company. Moreover, it was intended by the agreement that it would be applicable on all the present as well as future shareholders of the company. However, it was held by the judge that the last point should not be made a finalised inference while determining the disputed matters.

Articles’ Implied Conditions

A case study is presented for the elaboration.

Equitable Life Assurance

The 65th article of the company allowed the directors to disburse bonuses on the policies of life assurance of the members. While making use of this authority the directors were more kind to some of the policyholders and gave them larger bonuses as compared to others. This action of the directors created a conflict with the guarantees that had been given to the members when the policies were taken out by some of the members. It was held by Lord Steyn that the article should be interpreted in a way that it has an implication stating that no such use of the power given to the directors that leads to the deprivation of substantial guarantees should be made.

Lord Steyn stated that:

  • Discrimination between the methods of implication and interpretation is a necessity. By interpreting any term, it means to give it a meaning that is most proper legally. The wordings of the 65th article does not put any expressive limitation on the usage of the power given to the directors. Hence, it is not possible to associate a meaning with the article that precludes the directors from using the power in a way that overrides the policies of Guaranteed Annuity Rate, GAR.
  • The point to think critically is that, should there be an implication of any relevant obligation in to the article 65(1). The case does not have a nature that allows the implication of a term under law considering the incidents that are tacitly added to specific types of contracts. These rules that are standard implied conditions work as general default rules. For instance, in the cases of Scally and Social Services Board. If there has to made an implication of a term into the 65th article from its wordings, it is only possible when the article is viewed in its specific commercial setting. The terms such as these, play role of filling the ad hoc gaps.
  • In the case of Luxor Ltd, the discrimination was stated by Lord Wright as:
  • There are various uses of the word ‘implied term’. There are times when it relates to a terminology independent of the parties’ true intentions and depends on the rulings given by the law. For instance, the conditions or warranties which are imported by the law even when they are not explicitly mentioned. Consider the Sale of Goods Act and the Marine Insurance Act as examples. However, there is some difference in such a case where the relevant implication is being derived from aims regarded from the actual scenario of the parties.
  • The implication requested in the present case belongs to the second case, which can be arisen via arguments. The implied term under consideration can be associated with the parties, however, it does not have any dependency on the true intentions of the parties. As mentioned by Lord Hoffmann in the case of Banque Bruxelles, this is a kind of process of devising the complete agreement under its commercial setting.
  • This principle has been used with caution and any implementation of the principle that leads to an implication contradicting the explicit conditions of any text cannot be done.  To test legally any such term’s implication is strictly required. This is how I will approach towards the question raised that should there be an implication of a term that stops the directors from making such a use of their authority that undermines the GARs.
  • The question has a constructional nature completely, as it states that whether an implication is strictly required or not. As it has been observed by the GAR policy holders’ counsel, the bonuses given finally are not to be considered as bounties. They constitute substantially the remunerations upon the premiums that have been paid. And the freedom of the directors for the disbursing and value of the bonuses, has been given to them to benefit the policy holders. In relation to this fact, the commercial goal, for including secured rates in the policy, which is evident, is the protection of the policy holder when any fall happens in the rates of market, so that when the market rates fall, the policyholders are in a more advantageous position without the rates of market.
  • Hence, the policyholder of the GAR enjoys the choice instead of the Society of GAR. There is no doubt that it was a fine tactic of selling, used by the Society of GAR policies for marketing, by giving the guarantee of annuity rates to the policyholders. It is quite evident that this policy led to the attraction of many purchasers of the policies given by the GAR.  Moreover, it has been claimed by the Society that no additional charges were included for making this policy a part of the GAR policies.
  • This factor is unsuccessful in altering the assumptions made by the parties sensibly. It was presumed by the parties that no such action would be taken by the directors that violates the provisions of the contract. In such circumstances, the Society’s directors devised a policy that was overriding the contractual guarantees of any substantial worth.
  • I believe that implying such a term that prevents the directors from making any utilisation of their authority that results in undermining the contractual guarantees given to the parties is strictly required. The implication is necessary to make the reasonable presumptions of the parties effective. The test for implication has also been satisfied.

Interpreting the Just Expectations of the Founding Persons and Members of a Company

If the interpretation given by the founding persons, the one who open a company in UK, about the objective of forming that company varies from the arrangement of the constitution at the time of incorporating the company, then it may result in a liquidation of the company under the basis of justice and equity, as specified by Section 122 of the Insolvency Act 1986, pp 795ff. Moreover, if any member has some lawful expectations, that are not fulfilled, then that member may be given some relief, even if the expectations were not formally incorporated in the constitution, on the basis of unfair and prejudiced conduct as specified by Section 994 of Companies Act 2006.

It has been rejected by the courts of Australia, to rectify, on the same basis as were presented in the case of Scott. However, they have also stated that if the case is brought in a new proceeding than the defendant party may be given a remedy in the form of voting upon a special resolution to compensate the defect.

In the case of Attorney General of Belize, where the issue was regarding the rights of a special share whose ownership belonged to the government and the share was in a private company of telecommunication. Lord Hoffman stated:

  • Some common observations will be made by the Board regarding the process of implication. No right lies with the court to make an improvement in the instrument being interpreted whether it belongs to any contract, articles of association or any statutory law. The court cannot add terminologies making it more sensible and just than before. The court is only interested in interpreting the meaning of the instrument. Nevertheless, it is not always possible that the interpretation intended by the parties or the author will be same as the meaning of that document.
  • The meaning would actually be the interpretation that the instrument conveys to someone who knows all the history of the document and which would be accessible by the persons to whom the document addresses. It is the meaning of the objective which is also traditionally known as the parties’ intention or the parliamentary intention or the intention of the author of the instrument.
  • Implication is required when there is no explicit provision in the instrument regarding any particular event that may happen. Because then it may be assumed that no such event will take place, as the instrument would have stated any provision if the parties intended any event. Else, the instrument will continue to remain applicable as it is. Any loss that happens to the parties will not be compensated.
  • However, in certain cases, the addressee may know that the meaning of the instrument is something else. It would be assumed by him that the other relevant clauses of the instrument only hint towards an event that may happen. And that event may impact the parties’ rights. Although it is not mentioned clearly in the instrument, but it can be interpreted as such. So, in this scenario the court may imply a term that does not add to the instrument, rather it elaborates the meaning of the instrument.

Conclusion 

The proper construction of articles of association may be assisted by some company formation services UK but their proper interpretation is not a simple task. Hence, one should be very careful about the language used for the articles while devising the articles at the event of register a business name UK.

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