Incorporation of Companies/Company Documents

Question 1

• ss 7-38 CA 2006.

Answer 1

Read

Question 2

What are the important documents regarding companies?

Answer 2

There are four important documents regarding companies:
⁃	1) Memorandum of association.
⁃	2) Articles of association.
⁃	3) "Registration documents".
⁃	4) "Objects clause".

Question 3

What is a memorandum of association?

Answer 3

The memorandum of association is no longer as important as it used to be. The memorandum does not contain the objects clause any longer.

s 8(1) CA 2006 – states "A memorandum of association is a memorandum stating that the subscribers –
⁃	(a) Wish to form a company under this Act [CA 2006], and
⁃	(b) Agree to become members of the company and, in the case of a company that is to have a share capital, to take at least one share each."

A company only needs “one … person” as a shareholder: s 7 CA 2006.

The memorandum has to “be delivered to the registrar”: see s 9(1) CA 2006.

Under s 8(2) the memorandum must be in a prescribed form (set out below). This form is
prescribed in the Companies (Registration) Regulations 2008 (SI 2008/3014).

Question 4

Can the Memorandum be changed?

Answer 4

It is not possible to alter the memorandum (and it was not possible to do this under the Companies Act 1985 – but it was possible to alter the ‘objects clause’ in the memorandum under s 4 of the Companies Act 1985, and this can be done under s 31 of the CA ‘2006).

Question 5

What is the required form of the memorandum?

Answer 5

⁃ The Form of the Memorandum of Association, pursuant to the Companies Act 2006 (s 8(2)), is set out in The Companies (Registration) Regulations 2008 (SI 2008/3014), which contains a specimen form in Sch 1 for companies with share capital, and Sch 2 for companies which do not have a share capital .

⁃ These are set out in notes ***

Question 6

What are Articles of Association?

Answer 6

These are the main constitutional document of a company and have become more important under the CA 2006. These are public documents[ They can be viewed by the public by doing a companies’ search.] and describe the internal running of a company.

s 17(1) CA 2006[ This is an important section.] – the Articles of Association (called the Articles) are now the constitutional documents of a company (together with "any regulations and agreements to which Chapter 3 [of Part 3] applies": s 17(2) CA 2006).
⁃	Under chapter 3 of part 3 (ss 29 and 30 CA 2006) this states inter alia that alterations to companies articles of association must be by special resolution. 

This is a change, as the Memorandum of Association used to be included.

The Articles of Association of a company can be viewed, by the public, by doing a companies’ search. Thus, it is a public document.

Question 7

How are Articles of Association Constructed?

Answer 7

⁃ The Articles of Association are construed as any other document would be (one of the aims is to make the documents commercially workable):
⁃ Rayfield v Hands [1960] Ch 1, at p 9, per Vaisey J:
⁃ ‘ … the proper way to construe the articles of association of a company is as a commercial or business document to which the maxim ‘validate if possible’ applies.’

⁃ Given that this quote was in 1960 there has been some refinement in relation to the interpretation of contracts but in essence practitioners tend to view the Articles of Association as contracts - they basically contain covenants between members of the company.

⁃ Thus the articles are construed objectively and words are given their normal, natural meaning. And it may be possible to imply a term into the Articles of Association, when the Articles are looked at, objectively, against the relevant “background” in order to ascertain their proper “meaning”: see A-G for Belize v Belize Telecom Ltd [2009].

Question 8

What is the default position of Articles of Association?

Answer 8

⁃ Under S 20 CA 2006 if a company does not have its own set of articles then the default position is that it will have the relevant Model Articles apply by default (i.e. if no other articles are registered).
⁃ However, most companies will have their own set of articles - these will normally be professionally drawn up by firms of solicitors.
⁃ One provision that might be common in family companies is a right of pre-emption (right of first refusal by existing shareholders if another member wishes to sell their shares.)

Question 9

Can Articles of Association be changed?

Answer 9

⁃ Yes you can alter your articles but it must be by “special resolution[ This means there must be a 75% majority.]” in General Meeting[ This is a meeting of the shareholders.] – *s 21(1) CA 2006
⁃ This statutory right under s 21 is subject to a right under the general law that any change to the Articles must be must be “Bona fide for the benefit of the company as a whole”:

Question 10

*Allen v Gold Reefs of West Africa Ltd [1900]

Answer 10

Leading case, or at least the case that gave rise to this particular test. Decision of the Court of Appeal in England - would also be followed in Scotland.

⁃ A company had provision in its articles which allowed it to have a lien on shares that were not fully paid. This provision stated that “the company shall have a first and paramount lien for all debts obligations and liabilities of any member to or towards the company on all shares (not being fully paid) held by such member”. One shareholder who had both fully and partially paid shares did not pay calls on the shares.
⁃ The company changed the articles by special resolution under prior equivalent legislation to say that the company shall have a lien over paid up shares too[ “the company shall have a first and paramount lien for all debts obligations and liabilities of any member to or towards the company on all shares held by such member”]. This was challenged.
⁃ The Court held that this was valid. The master of the rolls said that the power under s 21[ Then s 50] must be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities enabling them to bind minorities. It must be exercise not only in the manner required by law but also “bona fide for the benefit of the company as a whole”. These conditions are always implied but are seldom if ever expressed. But if they are complied with then there are no other restrictions on the exercise of the power under s 21.

Question 11

Sidebottom v Kershaw, Leese & Co [1920]

Answer 11

⁃ Applied the test from Allen.
⁃ There was a private company which sought to alter its articles by means of special resolution. It sought to alter the articles to say that people who were shareholders but who competed with the company could no longer be shareholders - they had to transfer their shares to persons who the directors nominate for full value.
⁃ Sidebottom who carried on a business which competed with the company challenged this decision. He sought a declaration that this particular amendment to the articles was not valid.
⁃ The court however held that this was a valid alteration. The Master of the Rolls applied the test (“bona fide for the benefit of the company as a whole”) and then went on to outline his reasons why he thought the alteration was valid.
⁃ He said that looking at it broadly he couldn’t have any doubt that in a small private company like this the exclusion of members who are carrying on competing businesses may very well be of great benefit to the company - thus it satisfied the test of being “bona fide for the benefit of the company as a whole”.

Question 12

Citco Banking Corpn NV v Pussers Ltd [2007]

Answer 12

⁃ Decision of the privy council which upheld the test in Allen.
⁃ A company wanted to alter its articles by means of special resolution. It wanted to change the voting rights attached to shares. There was the creation of a new class of shares which, instead of having 1 vote per share had 50 votes per share. The resolution was passed by the 75% majority required.
⁃ This was challenged by Citco but the court held that the change was valid. The privy council looked at the test of “bona fide for the benefit of the company as a whole”. Lord Hoffman also considered another decision called Shuttleworth 1927 2 KB 9 to determine what is “bona fide for the benefit of the company as a whole”:
⁃ The court held that one must look at the matter objectively - what would the reasonable person regard as being for the company’s benefit - it is NOT the test of the person complaining.
⁃ The Privy Council also held that the party who is challenging the particular amendment’s validation bears the burden of proof. So the pressure is on the person making the challenge to prove that the change is not bona fide for the benefit of the company as a whole.
⁃ [So this case approve the test at the highest level and one assumes that the HL would follow this decision.]

Question 13

What are the requirements for the registration of a company?

Answer 13

Section 9 CA 2006 - this sets out the following requirements for the registration of companies via an application for registration. The application must include include (ss 9(1)-(5)):
⁃ (a) “company’s proposed name”
⁃ (b) location of “registered office” (which part of the United Kingdom)
⁃ (c) is liability “limited”, and, if so “by shares or by guarantee”.
⁃ (d) is company “private and public”
⁃ (e) if a company with “share capital”, “a statement of capital and initial shareholders”
⁃ (f) if “limited by guarantee, a statement of guarantee and the statement of guarantee”
⁃ (g) “statement of proposed officers”
⁃ (h) “intended address of registered office”
⁃ (i) “copy of … proposed articles of association” (unless using Model Articles).[ So if you are choosing not to use the model articles then you must include a copy of the proposed articles of association.]

⁃ See also ss 9(1)-(5) CA 2006 and ss 10 (“Statement of capital and initial shareholdings”); 11 (“Statement of guarantee), 12 (Statement of proposed officers”); and 13 (“Statement of compliance”)

Under s 9(6) the required documents must be delivered to the Registrar of Companies where the Registered Office is to be in Scotland. The Registered Office is the office where documents can be served on the company and the company is deemed to have had notice of them. Sometimes a company's registered office and place of doing business are different.[ However if you serve documents at the registered office of the company then the company are regarded as having notice.]

Question 14

What is a certificate of incorporaiton?

Answer 14

Only after registration will onethen receive a “Certificate of Incorporation”
⁃ This is a very important certificate.
⁃ s 14 CA 2006 – “registration”
⁃ s 15 CA 2006 – “certificate of incorporation” – must contain the following:
⁃ “(a) the name and registered number[ The number is important because although companies can change their names but they cannot change their number.] of the company,
⁃ (b) the date of its incorporation,
⁃ (c) whether it is a limited or unlimited company, and if it is limited whether it is limited by shares or limited by guarantee,
⁃ (d) whether it is a private or a public company, and
⁃ (e) whether the company’s registered office is situated in England and Wales (or in Wales), in Scotland or in Northern Ireland.”
⁃ The Registrar of Companies must sign or authenticate the certificate: s 15(3) CA 2006
⁃ A certificate of incorporation is “Conclusive evidence” of compliance with the requirements of the Companies Act.: s 15(4) CA 2006.
⁃ This is very important because if you are dealing with a company you need to know that the company actually exists - it goes on a public register.

[see example in notes]**

Question 15

Section 33(1) CA 2006

Answer 15

states that:
⁃ “The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants[ E.g. contract between the company and its members.] on the part of the company and of each member to observe those provisions.”

The following case law illustrates how s 33 works.

Question 16

Wood v Odessa Waterworks Co [1889]

Answer 16

⁃ There was a company that was required to pay a dividend from its profits. The directors decided that rather than pay the shareholders a dividend a resolution was passed that they would instead of giving a dividend there would be debenture bonds which could be redeemed by the shareholders.
⁃ This was challenged.
⁃ The court held that the question was simply whether it was within the power of the existing shareholders to insist against the will of the minority that the profits earned shall be divided not by the payment of cash but by the issue of debenture bonds by the company at 5%. It was held that the articles of association constitute a contract not merely between the shareholders and the company but between each individual shareholder and every other. This means that the question above must be answered in the negative if there is in the articles a contract between the shareholders as to the division of profits and the provisions of that contract have not been followed.
⁃ So in this case where it was sought by shareholders that instead of dividends being paid under the articles debenture bonds would be issued, but without changing the articles, this was in conflict with the articles and therefore invalid.
⁃ [So the articles hadn’t been complied with and thus the decision was invalid.]

Question 17

*Eley v Positive Life Assurance Co Ltd (1876)

Answer 17

⁃ Company was formed (P) and the Articles were drawn up by Eley (a solicitor). In the articles he put a provision that he should be the company’s solicitor and would undertake their legal work. Subsequently the company decided that they would dispense with his legal services and Mr Eley brought an application to challenge that decision.
⁃ The court of appeal held that if the introductory words are applied to the relevant article then it becomes a covenant between the parties to it that they will employ Eley. So far as that is concerned, the plaintiff is not a party to the articles of association. No doubt Eley thought that by inserting it he was making his employment safe as against the company. However, this stipulation is either a stipulation which would bind the members of else a mandate to the directors - either case it is a matter between the directors and shareholders and not between them and the plaintiff.
⁃ [Thus, since Eley was not bringing his claim as a shareholder of the company the articles did not apply to him and consequently he couldn’t insist upon the articles being enforced.]

Question 18

Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915]

Answer 18

⁃ Concerned a claim by Hickman who was unhappy with certain things in the company. Under the articles of association if there was a dispute regarding the articles then this was to be referred to arbitration. Arbitration is carried out privately. Hickman sought injunctions. The company argued that pursuant to the Articles such matters had to be referred to arbitration.
⁃ In the context of the particular case the court held that this was the case since it was required under the articles. The court held that an outsider, whom the articles purport to give rights, cannot sue on the articles treating them as contracts between himself and the company - those rights can only exist by virtue of a separate contract between the company and the outsider.
⁃ The court also held that it seems clear from other authorities that a company is entitled as against its members to enforce and restrain breaches of its regulations. In addition it is clear from many authorities that shareholders as against their company can enforce and restrain breaches of its regulations and in many of these cases judicial expressions of opinion appear which it is impossible to disregard.
⁃ The third proposition held by the court and perhaps the most important is that:
⁃ 1) No article can constitute a contract between the company and a third person.
⁃ 2) No right purported to be given to a person other than that of a member can be enforced against the company.
⁃ 3) Articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.
⁃ Thus in this case it was clear the matter had to be brought to arbitration since it was governed by the rules and regulations governing disputes between shareholders and the company.

Question 19

Beattie v E & F Beattie Ltd [1938] Ch 708

Answer 19

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Question 20

What are shareholders agreements?

Answer 20

Sometimes shareholders will get together and have an agreement between each other concerning certain courses of conduct. These are often known as shareholder agreements.

Question 21

*Russell v Northern Bank Development Corporation [1992]

Answer 21

⁃ The HL upheld a shareholder agreement that there would be no increase in the company’s share capital unless there was unanimous written consent between the parties to the agreement. A rights issue was proposed to increase the share capital by about £4m. There was a notice of an extraordinary general meeting. Russell objected to this citing the agreement between the parties and he sought an injunction.
⁃ It was held that the agreement was valid - that the shareholder’s agreement could be enforced and this increase in capital couldn’t go ahead.
⁃ Lord Jauncey said that an agreement as to how shareholders will behave will create agreements between the shareholders party to that agreement only and would NOT become a regulation of the company or be binding on the transferees of the shares or upon new or non-assenting shareholders.
⁃ [So agreements between shareholders are binding on the shareholders who are party to the agreement, but not those who are successors, new members or members who didn’t agree to the agreement.]

Question 22

What is the “great ultra vires saga”?

Answer 22

The “great ultra vires saga” relates to the historical requirement that a company was formed for certain “objects/objectives” (e.g. buying and selling oranges, renovating tables). A company could enter into transactions relating to this and transactions incidental to this but it couldn’t branch out from this because this would be ultra vires unless it changed its objects clause. But these objects clauses began to be drafted so widely that they covered virtually everything. People realised that this was becoming ridiculous so this eventually led to s 39 below.

So, a company’s ‘objects are unrestricted’, except where there is a specific restriction in the articles of association: see s 31 CA 2006.

Question 23

s 39(1) CA 2006

Answer 23

⁃ “The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.”[ This means that even if the company’s constitution says that the company can only carry out a certain trade, then if they enter into an ultra vires trade with a third party, the fact their constitution didn’t allow this will not affect the third party.]

However, this must be read in conjunction with ss 40 and 41 CA 2006
⁃ s 40(1) CA 2006:
⁃ “In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution.”[ The effect of this is considered in the two cases below under the “New Law” bit - the courts seem to have interpreted the provision somewhat narrowly and it hasn’t been quite the saviour that it was thought it would be.]
⁃ s 40(2) CA 2006:
⁃ “For this purpose-
⁃ (a)a person “deals with” a company if he is a party to any transaction or other act to which the company is a party,
⁃ (b)a person dealing with a company -
⁃ (i) is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so,
⁃ (ii) is presumed to have acted in good faith unless the contrary is proved, and
⁃ (iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution.[ This gives a wide ambit to the concept of good faith.]

Question 24

s 41 CA 2006

Answer 24

(“constitutional limitations: transactions involving directors or their associates”) – imposes personal liability on directors where they enter into a transaction with the company which would breach constitution of company. Remedies: voidable (unless innocent 3rd parties affected, or indemnity), an account of benefit and indemnity.

⁃ s 41 CA 2006:
⁃ Section 41[ While s 40 is concerned with third parties dealing with the company, s 41 relates to directors or connected persons dealing with the company.] allows a company to set aside a transaction and/or seek other remedies where the transaction involves a director of the company or the company’s holding company or a person connected with any such director (a connected person[ Connected persons have a defence under s 41(5)]) where the directors have exceeded their powers.
⁃ [So s 41 imposes personal liability on directors where they enter into a transaction with the company which would breach constitution of company.
⁃ The remedies are:
⁃ 1) the transaction is voidable (unless innocent 3rd parties affected, the relevant parties can’t make restitution, where there has been indemnification of the company or where the transaction has been confirmed by the company (s 41(4))
⁃ 2) an account of benefit[ Disgorgement of profits.] and
⁃ 3) indemnity[ This means that the directors must provide an indemnity as to any harm suffered by the company because of the offending transaction (s 41(3).]

Question 25

Rolled Steel Products (Holdings) Ltd. v British Steel Ltd. [1986]

Answer 25

The old law [NOW OBSOLETE] is set out in this case

Question 26

*Smith v Henniker-Major [2003]

Answer 26

The new law [which is relevant to s 40]

⁃ Inquorate meeting of the board of directors of the company (only 1 director was present). The director present was also the chairman and he purported to assign a cause of action from the company against other directors to himself. This transaction was challenged on the basis that the meeting was inquorate.
⁃ The Chairman sought to justify what happened on the basis of s 40(1)[ Then s 35A].
⁃ By majority the Court of Appeal held that this provision did not apply to validate the inquorate board meeting of the company (effectively you could not validate your own error or mistake under this provision.) There was a lengthy dissenting judgement (which Parker Hood thinks is the better opinion).
⁃ His dissent was on the basis that the provision should have allowed the decision to be valid because it concerned merely procedural irregularity, not nullity.
⁃ By contrast, the majority decision was on the basis that the general policy seems to be that if a document is put forward as a decision of the board by someone appearing to act on behalf of the company in the circumstances where there is no reason to doubt it’s authenticity, a person dealing with the company in good faith should be able to take it at face value. Thus where the person in question is a third party in the ordinary sense s 40(1) should be given a wide interpretation. Section 40(1) does not distinguish between third parties who are external and those who are internal (i.e. a director dealing with his own company). In this case the director was not simply a director dealing with the company - he was the chairman of the company whose duty it was to see that the constitution of the company was properly applied, yet he was personally responsible for the error by which he purported to turn himself into a one man board. The majority held that they had to assume good faith but that means no more than that he made an honest mistake - it doesn’t make it any less of a mistake or one for which he is any less responsible. On this basis, the majority held that they did not see how he could rely on his own error to turn his own decision which had no validity under the company’s constitution into a decision of the board - there was nothing in s 40(1) which would give it this magical effect.
⁃ [Thus s 40(1) will not apply where you are relying on your own error or mistake to validate it.]

Question 27

*EIC Services v Phipps [2005]

Answer 27

⁃ [Another case in which the Court of Appeal had to apply s 40(1)[ The old equivalent provision s 35A.]]
⁃ The directors had acted outside their authority. They were required to get members consent pursuant to the articles to capitalise a portion of an amount in the company’s share premium account so they could have a bonus issue. The bonus issue is a bonus for the shareholders.
⁃ The court held that in relation to a bonus issue its essence is that profits and other available reserves are capitalised and applied in paying up unissued shares or debentures which are issued to existing shareholders in proportion to their entitlement to dividends. The effect is that in contrast to a dividend which reduces the assets of the company, a bonus issue does not reduce those assets since the assets since the assets and liabilities side of the balance sheet remains unchanged, but the capital and reserve side of the balance sheet is rearranged with a reduction in the amount of profits and other reserves and an increase in the amount of the paid up share capital reflecting the increase in the issued share capital.
⁃ In relation to s 40(1) the court held that having regard to the nature of a bonus issue and the fact that it is an internal arrangement with no diminution of the assets or liabilities of the company with no change in the proportionate shareholdings and with no action required from the shareholders, the shareholders could not be said to be persons dealing with the company. (If a shareholder receives shares otherwise than by way of a bonus issue (e.g. by a rights issue) then he would have to deal with the company and the question would be whether a shareholder is within the intended reach of the section 40(1).)
⁃ Thus s 40(1) does not apply to save the transaction in this case - again it suggests that the courts have adopted a somewhat restrictive interpretatio to s 40(1).

Question 28

Cottrell v King [2004] 2 BCLC 413

Answer 28

(These cases deal with the equivalent provisions under the CA 2006).

Question 29

What happens in the case of companies which have been previously incorporated?

Answer 29

⁃ In the case of a company incorporated under the Companies Act 1985 (or any of the previous Companies Acts), the objects clauses contained within that company’s memorandum of association will be deemed to constitute provisions of their Articles of Association in terms of s 28 CA ‘2006 – and so they will be entitled to alter their objects clause: (a) by special resolution in general meeting, followed (b) by registration of the resolution in the Companies Register – as if the objects clause was contained in the articles - ss 21 & 26[ This just provides you must send an amendment to the Registrar of Companies within 15 days post amendment.] CA ‘2006.

Question 30

What is the “indoor management rule”?

Answer 30

In the absence of knowledge to the contrary, there is deemed compliance with the Articles of Association regarding “internal management” of the company. Royal British Bank v Turquand (1856).

[THERE IS A PODCAST ON ARTICLES OF ASSOCIATION]