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Does Your Company Paperwork Reflect Your Company Practice?

The ‘constitution’ of a company or LLP is the Memorandum and Articles of Association (“the Articles”).  These set out how the company is to be managed on a day to day basis and typically include provisions covering decision-making by Directors, conducting Director and Shareholder meetings and the process to transfer shares.  It is essential that these accurately reflect how the company is managed in practice and are kept up to date to avoid negative consequences in the future due to a lack of “housekeeping”. 

Traditionally, keeping company books and records up to date would have been the role of the company secretary.  However, as there is no longer a legal requirement to have a company secretary, basic company administration tasks can often be overlooked. 

The High Court considered this point recently in the case of Gunewardena v Conran Holdings Ltd.  The facts of the case are complicated and do not require discussion.  The important point to note from the case however is the precise moment upon which amendments to Articles take effect; namely upon the passing of the Special Resolution.  The requirement to file amended Articles with Companies House is a statutory requirement but this has no bearing on the status of the Articles, which alter upon the passing of the Special Resolution and not upon the date of filing. 

It is extremely common for companies and LLP’s to only become aware that their Articles do not reflect their business practice when an issue arises, often resulting in urgent amendments being required to clarify an issue or to resolve a dispute.  

In addition, various statutory registers are to be kept and maintained by a company or LLP, including a Register of Members, Register of Directors and a Persons of Significant Control Register, to name a few.  

For companies limited by shares, a Register of Members will record the shareholdings of the company, and for companies limited by guarantee and LLP’s, this will record those admitted as members in accordance with the constitution of the company or LLP.  

Another recent case highlighted the dangers of not keeping accurate company books.  Shares were transferred from a shareholder to a third party and whilst the necessary transfer documents were prepared and signed, the Register of Members was not updated - the transfer to the new shareholder was not recorded in the company books.  Later, the shareholders passed a resolution to approve a transaction.  The resolution required approval from a certain percentage of shareholders but, because the Register of Members had not been updated, it could not be determined that approval by the necessary percentage had been met and therefore the resolution approving the transaction was invalid.  This is an extreme case but highlights the hefty consequences of failing to perform a relatively simple company administration task. 

If you are in any doubt as to the accuracy of your company books, it is advised that you seek legal advice to ensure that your books meet statutory requirements.  For more information, please contact Kirstin Ejsmont or Graham Jones, or call 01224 632464.

 

 

 

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