Many directors of private companies aren’t familiar with their company’s Articles of Association and, in many cases, may have never read them. This is surprising given that Section 171 of the Companies Act 2006 requires directors to act in accordance with the company’s constitution, the Articles of Association. By neglecting this document, directors could unintentionally expose themselves and the company to significant risks.

In this blog, Walker Foster commercial and corporate solicitor and director Keith Hardington explores what Articles of Association are, why they are so important, the potential consequences of not adhering to them, and how often to update them.

What are Articles of Association?

The Articles of Association are essentially the rulebook for a company. This document governs the internal management of the company, laying out the procedures and protocols that directors and shareholders must follow. It covers everything from how decisions are made and how shares are issued to the rights and responsibilities of directors and shareholders.

Know your Articles - it’s important!

Many companies have outdated Articles or are unaware of their Articles’ full specifications, or even whereabouts - I recently acted for a company in a restructure. It was incorporated a century ago and its Articles were lost, and none were filed at Companies House.

Why is it dangerous if you’re unsure of your Articles? Well, Articles are a contract between the company and the company’s shareholders, and between the shareholders. They mean that shareholders can sue fellow shareholders or directors should they act outside of the Articles’ objects and clauses.

When acting on behalf of a business making a purchase or sale of assets or shares, we always check the Articles of all companies involved to be sure that the Articles are complied with and that the person initiating the action has the power to do so.

Any action and decisions of the business that were not within a company’s objectives would be considered ultra vires (that is beyond their power). Directors could be liable to the shareholders if they acted outside of the objects.

A company’s Memorandum is no longer the authoritative document

Under the 1985 Act, a company’s Memorandum used to record the company’s objects. However, since 1 October 2009, the Memorandum of the company is no longer part of the constitution of the company and doesn’t really record anything except its subscribers.

This means that a company Memorandum should only be used as a reference and the Articles are the authoritative document for company objects. Where companies still have the old Articles and they have never updated them since the 2006 Act came into force, section 28 of the Act moves the old Memorandum including the objects into the Articles.

If we are amending company Articles, we always check the Companies Act 2006 for guidance. We might see in particular sections of the Act’s wording such as “subject to the company’s Articles”. If the wording of the Act and the relevant clause within the Act do not allow amendments, then it is not possible for the Articles to change the effect of the Act.

The message is that it is best practice to always check both the Act and the Articles. 

Articles amendments

Should shareholders wish to make changes to a company’s board of directors, they must act according with Section 168 of Companies Act 2006. This specifies that changes to Articles such as removal of directors can be undertaken through ordinary resolution (50% of the company’s shareholders must agree to the change) and it’s not possible to override this clause through the Articles. This however, is where shareholders agreements can be useful so that shareholders can vote to procure removal directors in certain circumstances.

Shareholders agreements therefore are a useful adjunct to the Articles. A shareholders agreement is a private contract between the shareholders. There is a school of thought that if the company is a party to the agreement and it impacts upon the constitution of the company, then it is no longer private and that the contents of these agreements should potentially be filed with Companies House. Typically, they are not filed and are not made public.

Any further amendment to the Articles such as company name change, modification of shareholder voting rights or adoption of new Articles must be decided by special resolution. That means no less than 75% of the shareholders agreeing. A printed copy of the new Articles must be filed at Companies House within 15 days of the new resolution. It is a criminal offence to fail to file such changes within 15 days.

However, it is worth noting here that there are other time limits in the Companies Act for filing documents like these which relate to a company’s constitution. An example is that you have 28 days to file notice of allotment of shares with Companies House.

In the case of a company charge, if the charge is not notified and registered with Companies House within the specified timeline, it cannot be registered and an application to Court will be required. I have on many occasions seen this short circuited by the parties simply entering into a new agreement to start the timetable running again. That is not possible in many cases.

We can help with filing documents and their deadlines should you need any guidance with these.

Using model articles for company Articles

These days, under the Companies Act 2006, we have Model Articles of Association, which replaced the old Table A from the 1985 Act. The Model Articles provide a simple, ready-made set of rules for running a company. You can adopt them as they are, which is quick and easy, or tweak them to better fit your company’s needs. If your company has very specific or unusual requirements, you might even go for bespoke articles, tailored just for your situation.

Model Articles aren't just for one type of company - they cover a range of needs. There are versions for public companies (those listed and traded on stock exchanges) and for companies limited by guarantee. The latter are often used by charities and similar organisations that don’t have shares but still need a formal structure for governance.

While model Articles have many benefits and can simplify a company’s running, they can also present risks in certain circumstances.

Are your decisions void?

That brings me to the Hashmi case of February 2022, which reached High Court. In a nutshell, two contradicting clauses within a company’s Articles caused an issue when a company’s shareholders claimed that a remaining director had acted beyond his powers and decisions he made were void.

The conflict within the Hashimi case arose because Article 7 allowed a sole director to make decisions and pass resolutions if there was only one director of the company remaining. Yet, Article 11 stated that decisions of the directors were not valid unless there were two directors.

In contrast (and on different facts) Re Active Wear Limited (In administration) [2022] EWHC 2340 (Ch) the High Court held that a sole director would have the authority to make decisions on behalf of a company with Model Articles without modification.

Fixing Hashmi

A suggested solution, for past decisions, is to pass a shareholders’ resolution ratifying all of the decisions to that point in time. In respect of future decisions, the suggested solution would be to amend the Articles to disapply the model article at 11 (2). Any Articles need to be checked in case they have been amended and the numbering is different. In effect, this would simply remove the requirement to have two directors in a meeting for any valid decision. An alternative solution is to appoint a second director.

I suspect that business owners, directors and shareholders do not see the threat as particularly great and that they will cross the bridge if they come to it.

If there’s something else to learn from the Hashmi case, it is that a company which from the beginning will have a sole director should not be incorporated with model Articles that have not been amended to address such circumstances.   

Directors and Shareholders in owner managed companies, family companies and SMEs should all review their Articles and ensure that they understand them, that they work and also how they relate to any shareholder agreement (which I recommend). Get in touch and ask us for a review. We would be happy to assist.