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LAWS10083 Company law Establishment of companies; the Corporate Constitution
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LAWS10083 Company law Establishment of companies; the Corporate Constitution
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Week 3Establishment of companies; the Corporate Constitution
Sources of Company Law and the Company’s Constitution
Principle form of primary legislation for company law is the Companies Act 2006. In 1998 the
Secretary of State commissioned for an independent review of company law which would be
fundamental to the nation’s competitiveness. The commission in their final report came up with the
conclusion that a company law must be produced that would be primarily enabling and facilitative
and to strip out regulation that is no longer necessary. The result was an act with some 1300
sections and 16 schedules.
After the enactment of the 2006 Act, any changes to be made to it were mainly made by way of
secondary legislation. This was to ensure that the Government can respond quickly to changes in
economic or technical factors, due to the lower level of Parliamentary scrutiny involved in DL. In
addition to this, community obligations of the UK in relation to company law may be implemented
by secondary legislation by way of the general powers conferred by the European Communities Act
1972. However, implementing rules through secondary legislation means that they will be subject to
less democratic scrutiny.
Despite the coming into force of the 2006 Act, there are many rules that remain uncodified and as
such we refer to common law. Even where there has been codification of common law, some of
these codification efforts are just restatements of the common law and therefore, common law will
still be referred to.
The Company’s Constitution
Rule governing the internal relations of the company are not regulated by statute, but by the
company itself. The rules governing the internal relations of the company are laid down in the
constitution of the company, known as the articles of association.
The principle is that the articles can deal with any matter which is not, or to the extent that it is not,
regulated by any of the above sources of company law. This is an assumption upon which the Act is
drafted. For example the articles can deal with the division of power between the board and the
shareholders and the composition, structure and operation of the board.
Thus, it can be claimed that in Britain, the shareholders constitute the ultimate source of managerial
authority within the company and the directors obtain their powers by a process of delegation from
the shareholder, albeit a delegation of a formal type, which so long as it lasts, may make the
directors the central decision making body on behalf of the company.
Model Articles:
The Companies Act 2006 provides for model articles of association for different companies. There
are separate models for public and private companies.
When a limited company is formed, it will be treated as having adopted the model articles, except to
the extent that it choses to have different articles, either in whole or part- s20 (1) CA 2006.
, The company can also expressly exclude the model entirely and adopt a set of articles that contain
very different provisions. S. 20 (1)(b) indicates that the choice may be made implicitly, by adopting
articles which in one or more ways is inconsistent with the model and then the model will apply to
deal with matters expressly not dealt with by the company i.e. a gap filling role.
Constitution:
The 2006 Act defines the term company constitution as including the articles of association but is not
limited to them. Also included in the definition is any resolution or agreement to which Chapter 3
applies (Ch 3 applies to any special resolutions of shareholders, any resolution or agreement made
by a class of members binding on the whole of that class of members, any unanimous resolution or
agreement adopted by the members of a class provided that it would otherwise not be binding on
them.
Common law tends to classify rule books of clubs, associations etc as contractual agreements. S 33.
of the 2006 Act states that the provisions of the company’s constitution bind the company and its
members to the same extent as if there were covenants on the part of the company and each
member to observe it. Thus articles in essence constitute a contract between the company and its
members. Thus, the articles will be enforceable as between members. The contract created by
section 33 is therefore a multi-party contract. The contract becomes a public document at the
formation of the company, this is to ensure that those who deal with companies have a legitimate
expectation that the registered articles represent an accurate statement of the company’s internal
regulations. Scott v Frank F Scott the CA held that the articles cannot be later rectified to give effect
to what the incorporators had actually intended but failed to embody in the registered document,
since the reader of those registered documents could have no way of guessing that any error had
been made in transposing the incorporators agreement into the document (this being the policy).
However, the policy is being undermined by the decision in which the doctrine of informal and
unanimous shareholder consent has been applied to change the constitution, though any such
alteration must be communicated to the registrar- ss. 29 and 30 of the 2006 Act.
It must be noted that only parties to the contract can enforce the contract. Non members cannot
enforce the contract even if they are intimately connected to the company. Hickman v Kent or
Romney Marsh Sheepbreeders Association- a person is both a member and a director of the
company. Can he or she enforce rights conferred by the articles, even if that right is conferred upon
the claimant in his capacity as director of the company? The answer is no. Ashbury J in the Hickman
case said an outsider to whom rights purport to be given by the articles in his capacity as such
outsider, whether he is or subsequently becomes member, cannot sue on those articles, treating
them as contracts between himself and the company, to enforce those rights. As a consequence of
this interpretation, a promoter who becomes member cannot enforce a provision that the company
shall reimburse him the expense he is incurred (English and Colonial Produce Re).The Hickman case
concerned a provision in the articles that any dispute between a member and the company will be
referred to for arbitration and this was enforced. In Beattie v Beattie Ltd on relying upon the dictum
of Hickman, the CA held that a dispute between a company and a director (who was a member) was
not subject to the arbitration provision on the articles because the dispute was between director
qua director. In Rayfield v Hands the articles of the company contained a provision stating that a
member who wishes to sell his shares will give notice to the directors who will take the said shares
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