62.This Part deals with various matters relating to a company’s constitution. It replaces similar provisions in the 1985 Act. It starts by defining (non-exhaustively) «a company’s constitution» and then makes provision about the main constituent parts of a company’s constitution (the articles of association and certain classes of members’ resolutions and agreements), including their legal effects, how they are to be notified to the registrar and made available to members, and how changes to them are to be dealt with.
Chapter 1: Introductory
Section 17: A company’s constitution
63.This section is a new provision. It sets out a definition of «a company’s constitution» which will apply throughout the Act, and the other «Companies Acts» (defined in section 2), unless the context requires a wider or more restricted meaning (see for example section 257, which expands the definition of a company’s constitution for the purposes of Part 10). The concepts of a company’s constitution and the rights and obligations arising under it are used both in this Part and elsewhere in the Act.
64.The definition is expressed to be non-exhaustive. In addition to the provisions of companies’ articles and the resolutions and agreements to which Chapter 3 of this Part applies (described in section 29), the contents of certain other documents are clearly of constitutional relevance for certain purposes. For example the certificate of incorporation summarises key information pertaining to the company such as whether it is public or private limited – see section 15.
Chapter 2: Articles of Association
65.A company’s articles are rules, chosen by the company’s members, which govern a company’s internal affairs. They form a statutory contract between the company and its members, and between each of the members in their capacity as members, and are an integral part of a company’s constitution. At present, companies may divide their constitutional rules between their memoranda and their articles, with the terms of their memoranda being capable of being altered after formation in some respects but not in others. In future, the memorandum will be a very simple document of purely historic significance, evidencing an intention to form a company, and all the company’s key internal rules on matters such as the allocation of powers between the members of a company and its directors will be set out in the articles – see notes on sections 8 and 28.
Section 18: Articles of association
66.This section replaces section 7(1) and (3) and section 744 of the 1985 Act. It carries forward the requirement that all registered companies must have articles. The provisions of this section have been updated to reflect the changes made by section 19, which gives the Secretary of State the power to prescribe «default» model articles for different descriptions of companies. As a result of this change, some types of company that are currently required to register articles with the relevant registrar of companies (for example, private companies limited by guarantee) will have the option of not registering articles but relying on the «relevant model articles» for that description of company.
67.As now, the articles must be contained in a single document and must be divided into consecutively numbered paragraphs.
68.Generally speaking, companies formed under the 1985 Act have freedom to make such rules about their internal affairs as they see fit, subject to the qualification that if a company’s articles contain anything that is contrary to the provisions of that Act, or against the general law, then it will have no effect. This principle will also apply to the articles of companies which are formed and registered under the Act.
Section 19: Power of Secretary of State to prescribe model articles
Section 20: Default application of model articles
69.Section 8 of the 1985 Act enables the Secretary of State to prescribe model forms of articles for companies registered under that Act (see the Companies (Tables A to F) Regulations 1985 (SI 1985/805)). Articles for certain special types of companies used in particular sectors, for example, commonhold associations, right to manage («RTM») companies, and right to enfranchise («RTE») companies are prescribed by regulations made under the Acts of Parliament that created these types of company.
70.Although sections 8 and 8A of the 1985 Act allow the Secretary of State to prescribe forms of articles (and memoranda) for a number of different types of company under section 8, he is only able to prescribe «default» model articles for companies limited by shares. «Default» model articles are model articles which apply to companies of a particular description where they have not registered any articles of their own, or have not made provision for a particular matter for which there is a corresponding model article. «Default» model articles apply to a company of the description for which they are prescribed only to the extent that it has not modified the default provision in question in its own registered articles or excluded it, or the model articles in their entirety, from the registered articles.
71.The rationale behind this is that the model articles should operate as a «safety net» which enables the members and directors of such companies to take decisions in circumstances where a company has failed to provide the appropriate authority in its registered articles (or failed to register articles at all).
72.These two sections replace section 8 of the 1985 Act. In line with the CLR’s recommendations (Company Formation and Capital Maintenance, paragraph 2.22), the Secretary of State will have the power to prescribe model articles, including «default» model articles, for different descriptions of companies formed under the Act.
73.For existing companies, there will be no change. The principle is maintained that the version of the model articles that was in force at the time that a particular company was originally registered will continue to apply to that company. For the majority of companies limited by shares on the register at the date that the Act comes into force, the «default» model articles will continue to be the Companies Act 1985 Table A («Table A»).
74.Existing companies will be free to adopt, wholly or in part, the model articles prescribed for companies of a particular description formed under the Act (see subsection (3) of section 19). For example, an existing private company limited by shares may prefer to adopt the new model articles for private companies limited by shares, or indeed the new model articles for public companies formed under the Act (with or without modification) in place of the current Table A articles, or previous articles of its own devising.
75.As with Table A, the adoption of model articles by companies formed under the Act will be entirely a matter for individual companies. They will be able to incorporate (with or without amendment) provisions from the model articles, and/or add to those provisions, and/or exclude such provisions as they think fit.
76.They will also be able to adopt the provisions of model articles by reference. This is a common practice, which enables a company that wishes to incorporate specific provisions of the model articles into its own registered articles to do this without having to copy out the provision in question. To take an example, a company’s registered articles may say something to the following effect: «the model articles apply except for articles x, y and z», or «the company’s articles are A, B and C, plus model articles g, p and q. Model article n applies but is amended as follows: …». Companies have found such techniques useful in the past and they will continue to be permitted.
Section 21: Amendment of articles
77.Subsection (1) provides that, as now, a company’s articles can in general be amended by special resolution. This restates section 9(1) of the 1985 Act.
78.Subsections (2) and (3) make it clear that this general principle is subject to certain rules in charities legislation about the ability of companies which are charities to change their constitutions and the effects which such changes have. There are separate but broadly similar rules for English and Welsh, Scottish and Northern Irish charities.
Section 22: Entrenched provisions of the articles
79.Section 22 is a new provision. It replaces the current practice (provided for in section 17(2)(b) of the 1985 Act), whereby companies are able to entrench certain elements of their constitution by putting them in their memoranda and providing that they cannot be altered.
80.This section permits companies to provide in their articles that specified provisions may be amended or repealed only if conditions are met that are more restrictive than would apply in the case of a special resolution. Such a provision is referred to as a «provision for entrenchment». As a result of this section companies formed under the Act will not be permitted to provide in their articles that an entrenched provision can never be repealed or amended.
Section 23: Notice to registrar of existence of restriction on amendment of articles
81.This is a new provision that requires a company to give notice to the registrar when an entrenching provision is included in its articles (whether on formation or subsequently) or where the company’s articles are altered by order of a court or other authority so as to restrict or exclude the power of the company to amend its articles. There is a corresponding requirement as to notice where the company amends its articles so as to remove a provision for entrenchment or where the articles are altered by order of a court or other authority so as to remove a provision for entrenchment or any other restriction on, or any exclusion of, the power of the company to amend its articles.
Section 24: Statement of compliance where amendment of articles restricted
82.This is a new provision. Where a company’s articles contain provision for entrenchment or where the articles are subject to an order of a court or other authority restricting or excluding the company’s power to amend its articles and the company subsequently amends its articles, it is required to send to the registrar the document making or evidencing the amendment. This document must be accompanied by a «statement of compliance» (see note on section 13).
83.The statement of compliance must certify that the amendment to the articles has been made in accordance with the company’s articles (including any provision for entrenchment) or, where relevant, in accordance with any order of the court or other authority that is in force at the time of the amendment.
84.The purpose of the provisions in sections 23 and 24 is to ensure that the registrar, and any person searching the public register, is on notice that the articles contain entrenching provisions and that special rules therefore apply to the company’s articles.
Section 25: Effect of alteration of articles on company’s members
85.This section restates section 16 of the 1985 Act. The only difference is that section 16 also applied to alterations of a company’s memorandum. A company formed under the Act will not be able to (or need to) alter its memorandum.
86.This section retains the principle that a member of a company is not bound by any alteration made to the articles subsequent to his becoming a member if the alteration has the effect of increasing his liability to the company or requires him to take more shares in the company. A member may however give his written consent to such an alteration and, where he does, he will be bound by it.
Section 26: Registrar to be sent copy of amended articles
87.The First Company Law Directive (68/151/EEC) requires Member States to take such measures as are required to ensure that companies disclose certain constitutional information which will then be made available to the public in a central register. In particular, companies are to be required to disclose (i) their «instrument of constitution, and the statutes if they are contained in a separate instrument»; (ii) any amendments to these instruments; and (iii) «after every [such] amendment…the complete text of the instrument or statutes as amended to date». For UK companies, the «instrument of constitution» equates to the memorandum and the «statutes» equate to the articles. The central registers are those kept by the registrars of companies for England and Wales, Scotland and Northern Ireland.
88.This section replaces equivalent provisions in section 18(2) and (3) of the 1985 Act and Schedule 24 to that Act.
89.Where a company fails to comply with the provisions of this section, the company and every officer of the company who is in default commits an offence. The penalty for this offence is set out in subsection (4).
Section 27: Registrar’s notice to comply in case of failure with respect to amended articles
90.This section is a new provision. It gives the registrar a means of ensuring that companies comply with the obligation set out in section 26 without having to resort to criminal proceedings. (However, the offence of failing to file amended articles is retained: see of section 26(3)).
91.Where the registrar becomes aware of any default in complying with section 26 (or any similar provision of another enactment that was in force at the time of the default, for example, section 18(2) of the 1985 Act), she may give notice to the company requiring it to rectify the breach within 28 days. Where the company complies with the notice, the company will avoid prosecution for its initial failure to comply. If the company does not comply, it will be liable to a civil penalty of £200, recoverable by the registrar as a debt, in addition to any criminal penalty that may be imposed (see, for example, section 26(4)).
Section 28: Existing companies: provisions of memorandum treated as provisions of articles
92.For companies formed under the Act, the memorandum will contain limited information evidencing the intention of the founder members to form a company. The memoranda of existing companies, on the other hand, will contain key constitutional information of a type which will in future be set out in the articles or provided to the registrar in another format (see Part 2). Subsection (1) of this section provides that such material is to be treated for the future as part of the company’s articles.
93.Subsection (2) of this section makes it clear that where the memorandum of an existing company contains a provision for entrenchment (see note on section 22) at the date that this part of the Act comes into force, this will be deemed, with effect from that date, to be a provision for entrenchment in the company’s articles.
Chapter 3: Resolutions and Agreements Affecting a Company’s Constitution
94.This Chapter replaces equivalent provisions in the 1985 Act on the registration of resolutions and agreements and on making these available to members.
Section 29: Resolutions and agreements affecting a company’s constitution
95.This section replaces section 380(4) and (4A) of the 1985 Act. It lists the resolutions and agreements that must be forwarded to the registrar for registration (see section 30) and made available to members on request (see section 32).
Section 30: Copies of resolutions or agreements to be forwarded to registrar
96.This section restates section 380 (1), (5) and (7) of the 1985 Act and Schedule 24 to that Act. Where a company passes a resolution or enters into an agreement of the type listed in section 29, it must forward a copy of the resolution or agreement to the registrar for registration within 15 days of the date on which the resolution was passed. If a company fails to do this, the company, and every officer of it who is in default, commits an offence. For the penalty, see subsection (3).
97.Where a resolution or agreement which affects a company’s constitution is not in writing, the company is required to provide the registrar with a written memorandum setting out the terms of the resolution or agreement in question.
Chapter 4: Miscellaneous and Supplementary Provisions
Section 31: Statement of company’s objects
98.This section provides for a new approach to the question of a company’s objects. Under the 1985 Act all companies are required to have objects and these objects are required to be specified in the memorandum. The 1985 Act also makes specific provision for where a company states its objects to be to carry on business as a general commercial company (see section 3A of the 1985 Act).
99.Based on a recommendation of the CLR (Final Report, paragraph 9.10), under the Act a different approach is taken. Instead of companies being required to specify their objects, companies will have unrestricted objects unless the objects are specifically restricted by the articles (see subsection (1)). This will mean that unless a company makes a deliberate choice to restrict its objects, the objects will have no bearing on what it can do. Some companies will continue to restrict their objects. Companies that are charities will need to restrict their objects (under charities legislation) and some community interest companies may also choose to do so.
100.Subsection (2) provides that where a company changes its articles to add, remove or alter a statement of the company’s objects, it must give notice to the registrar. The registrar is to register that notice, and the alteration does not take effect until it has been so registered.
101.Subsection (3) ensures that such an amendment to the company’s articles will not affect any rights or obligations of the company or render defective any legal proceedings by or against it.
102.For companies which are charities, the effect of this section is subject to section 64 of the Charities Act 1993 in England and Wales and in Northern Ireland subject to the Charities (Northern Ireland) Order 1987 (SI 1987/2048 (NI 19)) (subsection (4)).
103.Subsection (5) makes equivalent provision for Scotland. These provisions impose additional requirements in the case of companies which are charities when changing certain aspects of their constitutions, including their objects.
104.The directors of a company are under a duty to observe the company’s constitution (see section 171) although restrictions in objects will, as now, have little effect outside of the internal workings of the company because of the effect of sections 39 and 40 (except in the case of charities where modified rules again apply – see section 42).
Section 32: Constitutional documents to be provided to members
105.This section replaces section 19 of the 1985 Act and Schedule 24 to that Act. It gives members the right to obtain from the company copies of the company’s articles and certain other documents of constitutional importance (see subsection (1)).
106.The provision in the 1985 Act which enables a company to charge its members 5p for a copy of its articles and/or memorandum has been removed. This information must in future be provided to the members (on request) free of charge.
107.Where a company fails to comply with the provisions of this section, every officer of the company who is in default commits an offence. For the penalty for this offence, see subsection (4).
Section 33: Effect of company’s constitution
108.Subsection (1) of this section replaces section 14(1) of the 1985 Act. Its effect is that the provisions of a company’s constitution constitute a special kind of contract, whose terms bind the company and its members from time to time. Like section 14(1), the provisions of this section are excepted from the general principle set out in section 1 of the Contracts (Rights of Third Parties) Act 1999, so that provisions of a company’s constitution will not confer any rights on persons other than the company and its members. Unlike section 14(1), section 34 refers to «a company’s constitution», rather than its «memorandum and articles». This reflects the new division of formation and constitutional information between the memorandum, articles and other constitutional documents noted above.
109.The language in subsection (1) has been updated but there is no change to the law (the provision continues to reflect what the law has always been: in particular a company’s constitution binds both the company and its members).
110.Subsection (2) replaces section 14(2) of the 1985 Act. It provides that amounts which a member of a company is obliged to pay to it under its constitution are debts due to the company. In England and Wales and Northern Ireland, such debts are ordinary contract debts.
Section 34: Notice to registrar where company’s constitution altered by enactment
111.This section replaces section 18 of the 1985 Act and Schedule 24 to that Act.
112.The provisions of a company’s constitution may be altered by legislation, rather than by a resolution or agreement of the company’s members. Such legislation will either be of general relevance to all companies (for example, a new Companies Act provision that provisions of a certain type in any company’s articles are void), or to all companies of a particular type (for example, new commonhold legislation changing the provisions prescribed for inclusion in the articles of all commonhold associations) or it will be relevant only to a particular company (for example, a private Act of Parliament amending the articles of a specific company established by an earlier Act).
113.In keeping with the principles underlying section 26, it is important that those searching the register of companies should be able to be made aware of the changes to companies’ articles which legislation may effect. However, there is a balance to be struck between maintaining transparency on the one hand and inundating the registrar and searchers with mountains of paper which will be of little practical use to persons searching the public register (and whose contents are generally available in any event). The section therefore does not require companies to send copies of most public general Acts which alter their articles (such as Companies Acts or new commonhold legislation) to the registrar. It does however require «special enactments» (as defined in subsection (4)) to be sent to the registrar by companies whose articles are altered by the enactment in question.
114.Where an enactment to which this section applies alters a company’s articles, or where such an enactment alters a resolution or agreement affecting the company’s constitution, the company is obliged to send a copy of the articles, or the resolution or agreement in question, as altered, to the registrar.
115.The procedural rules for sending such legislation to the registrar, and the penalties for non-compliance with them, are as for section 26.
Section 35: Notice to registrar where company’s constitution altered by order
116.This is a new provision which provides a mechanism for registering alterations which are made to a company’s constitution by an order of the court or other authority (for example, the Charity Commission). It obliges companies to give notice of such alterations to the registrar, and to supply a copy of the articles, or the resolution or agreement in question, as altered to the registrar.
Section 36: Documents to be incorporated in or accompany copies of articles issued by company
117.This section replaces section 380(2), (6) and (7) of the 1985 Act and Schedule 24 to that Act. It provides that every copy of a company’s articles which it issues must be accompanied by various documents: in particular resolutions, agreements, enactments or orders which affect or evidence alterations to the company’s constitution (see subsection (1)) unless the effect of the resolution, agreement, enactment or order has been incorporated into the company’s articles or is no longer in force.
118.The intention behind this provision is that information provided on a request for a copy of the company’s articles should be up-to-date but the company should not be obliged to provide the same information twice (i.e. in different forms).
Section 37: Right to participate in profits otherwise than as member void
119.This section restates section 15(1) of the 1985 Act. It provides that a company limited by guarantee without a share capital cannot, by means of a provision in its articles or a resolution of its members, confer on any person a right to participate in its divisible profits otherwise than as a member. As under the 1985 Act, there is no statutory restriction on the members of such companies participating in their profits, unless they have sought exemption from the use of the word «limited» in their names.
Section 38: Application to single member companies of enactments and rules of law
120.Under section 7 it will be possible for a single person to form any type of company. This section provides that in future any enactment or rule of law that is applicable to companies formed by two or more persons (or having two or more members) applies (with any necessary modifications) to companies formed with one member (or having only one person as a member). This is already the case in respect of private limited companies: see the Companies (Single Member Private Limited Companies) Regulations 1992 (SI 1992/1699).