In this briefing, we consider some of the main changes that the 2006 Act will make in relation to companies’ constitutional documents, corporate capacity - ie what companies can and cannot legally do - and rules for the valid execution of deeds and other contracts. Please note that special rules will apply to charitable companies, which are not covered in this note.

This briefing note should be read in conjunction with our earlier briefing, Companies Act 2006: Introduction and background.

Timing

On 28 February, the government announced that the changes outlined below would come into force on 1 October 2008.

Capacity and objects

Unless a company’s articles specifically restrict the objects of the company, its objects will be unrestricted. Companies will be able to enter into any lawful transaction, except as specifically forbidden by their articles. The doctrine of ultra vires, under which no company could validly enter into any transaction beyond its express powers as set out in its constitution, should finally become history. However, existing objects will remain in force to limit the activities of a company unless and until removed by appropriate members’ resolutions. Amendments of objects will not take effect until the Registrar of Companies registers the notice of amendment, which the company is required to submit. Most companies will probably want to remove restrictive objects in order to avoid any element of doubt over the extent of their powers.

Where a company does restrict its objects, the company will not be able to escape liability under contracts by arguing that a particular contract was of a kind forbidden by its articles, or that particular internal approval procedures were not followed. In favour of any person dealing with a company in good faith, the power of the directors to commit the company or authorise others to do so will be deemed to be free of any limitation under the company’s constitution. For this purpose, a person will not be regarded as acting in bad faith by reason only of knowing that an act is beyond the powers of the directors under the company’s constitution.

Third parties will not be obliged to enquire about limitations in the constitution.

However, where:

  • a company enters into a transaction which is in fact beyond its capacity or the powers of the directors; and
  • the parties to the transaction include a director of the company or its holding company or a connected person, the company will be able to declare the transaction void. These provisions largely preserve the current position.

Execution of documents

Documents, including deeds, will be validly executed by public or private companies if they are expressed in any form of words to be executed by the company and signed:

  • by two directors;
  • for public companies, and private companies which choose to have a secretary, by a director and secretary; or
  • for the first time, by a single director - but not a secretary - in the presence of a witness who attests the signature.

Common seals may also still be used. Companies will also still be able to appoint attorneys to execute documents if their articles allow this.

In favour of a good faith purchaser, a document will be deemed to have been duly executed if it appears to be signed in accordance with the above provisions. A purchaser specifically includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property.

As is now the case, where a document is to be signed by a person as a director or secretary of more than one company, he or she must sign separately in each capacity.

Constitutional documents

The overall format of company constitutions - the memorandum and articles of association - has barely changed in over a century. Regrettably, the same is often true of the language in which they are written. Major changes are on the way.

Currently, the memorandum usually contains several pages listing the activities that the company is authorised to carry on. This will no longer be necessary as the 2006 Act will, as noted above, allow a company to do anything lawful that is not expressly prohibited by its constitution.

The memorandum of association of a company incorporated under the 2006 Act will therefore simply be a short statement of the wish of those forming the company to be incorporated, the company’s name and type and its initial share capital. The memorandum will be impossible to amend and will be of historic significance only. The key constitutional document in all cases will be the articles. Model form articles for both private and public companies have been published. These will be shorter and simpler documents than those based on the existing default articles, known as “Table A”. This is partly because many of the common default provisions set out in Table A will be embodied in the Act itself. In addition, in a commendable development, the model forms use more straightforward commercial English than has been usual in the past.

Existing companies will have to continue to abide by their existing articles, including provisions incorporated into them, such as Table A, unless and until they are duly amended. All provisions of an existing company’s memorandum other than the basic details referred to above will be deemed to be part of the articles, including any restricted objects. Unfortunately, there will be scope for confusion, as companies with identical articles but incorporated on different dates - before and after 1 October 2008 - may be subject to different restrictions. This will affect in particular steps such as reduction of capital, repurchase of own shares and issue of redeemable shares. Currently, these steps must be expressly permitted by the articles, but under the 2006 Act, they will be permitted unless expressly forbidden.

It will remain possible for companies to “entrench” certain provisions in their articles, ie to provide that certain provisions can be amended only with the approval of a majority exceeding the normal 75 per cent. This can be useful, for instance, in a joint venture where one party holds less than 25 per cent of the votes. Provision for entrenchment may only be made in the articles on formation or by an amendment of the articles agreed to by all the members. Notice of entrenched provisions, and of any later change in them, must be given to the Registrar.

However, it will no longer be possible to include articles that cannot be amended in any circumstances. A unanimous resolution or court order will have power to remove all entrenchment provisions (and their removal will have to be notified to the Registrar). Transitional provisions will allow existing companies to retain existing entrenched provisions that are currently impossible to amend. These can, though, still be changed by order of the court or other competent authority. This would apply, for instance, to special clauses contained in a company’s memorandum, although not required to be contained there.

Members will be entitled to copies of the company’s memorandum and articles free of charge. Currently, companies can charge a small fee.

Companies will be able to provide in their articles for methods of changing their names other than a special resolution under the legislation. They might, for example, permit changes to be made by ordinary resolution or even board resolution. If a name is changed under such an alternative method, the Registrar must be provided with a statement that the change was made in compliance with the relevant provisions. There are also provisions for changes of name to be made conditional on the occurrence of an event, but this will not allow names to be reserved in advance. Where a company changes its name, its articles will be deemed to be amended so far as references to the name are concerned, so that no actual amendment will be required. Many companies will still wish to reproduce their articles showing the new name, as a matter of good practice and to avoid any possibility of confusion. Section 36 of the Act will require companies to include in every copy of their articles copies of various types of members’ resolution and court orders altering the company’s constitution. This extends to a copy of any resolution or agreement “affecting a company’s constitution”. However, this category of resolution extends well beyond amendments to the articles and would in fact include any special resolution and certain other resolutions; see section 29. It may or may not come as a surprise that this preserves the existing position. It is likely that a substantial number of companies do not strictly comply and attach only resolutions amending the articles.

Please get in touch with your usual Wragge & Co contact, or one of the partners named below, for further advice.

Useful links

For the Companies Act 2006, see:

http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdf

Or perhaps more useful, the related DTI guidance notes (which do not have legal effect):

http://www.opsi.gov.uk/acts/en2006/ukpgaen_20060046_en.pdf