Registration and its effect

Clause 14: Registration

57.     This clause replaces section 12(1) of the 1985 Act. As now, where the registrar is satisfied that all of the requirements of the Bill as to registration have been met she will register the documents delivered to her and issue a certificate of incorporation under clause 15 (Issue of certificate of incorporation).

Clause 15: Issue of certificate of incorporation

58.     This clause replaces section 13(1)(2)(6) and (7) of the 1985 Act. It prescribes the contents of the certificate of incorporation issued by the registrar on registration of a company. The certificate of incorporation is conclusive evidence: that the requirements of the Bill as to registration have been met; that the company has been registered; and (where relevant) that the company has been registered as a limited company or a public company.

59.     There is one change to what the certificate of incorporation is required to state: in future this will include details of whether the company's registered office is situated in England and Wales (or in Wales), in Scotland or in Northern Ireland. It has been the registrar's practice to include this information in the certificate of incorporation, but there is currently no requirement for this. The certificate will also state, where the company is limited, whether it is limited by shares or by guarantee.

Clause 16: Effect of registration

60.     This clause replaces section 13(3)-(5) of the 1985 Act. It does not make any substantive changes to the current provisions and provides, amongst other things, that the subscribers to the memorandum, together with such other persons as may from time to time become members of a company, are a body corporate by the name stated in the certificate of incorporation. This means that on registration a company becomes a legal person in its own right, which is distinct from the people who own it (the members) and the people who manage it (the directors).

PART 3: A COMPANY'S CONSTITUTION

61.     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

Clause 17: A company's constitution

62.     This clause is a new provision. It sets out a definition of "a company's constitution" which will apply throughout the Bill, and the other "Companies Acts" (defined in clause 2: The Companies Acts), unless the context requires a wider or more restricted meaning (see for example clause 240: References to company's constitution, which expands the definition of a company's constitution for the purposes of Part 10: Company directors). The concepts of a company's constitution and the rights and obligations arising under it are used both in Part 3 (A Company's constitution) and elsewhere in the Bill (as they are in the 1985 Act).

63.     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 clause 29: Resolutions and agreements affecting a company's constitution), the contents of certain other documents, for example, a company's certificate of incorporation, are clearly of constitutional relevance for certain purposes.

CHAPTER 2: ARTICLES OF ASSOCIATION

General

64.     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 further clause 8: (Memorandum of association) and clause 28 (Existing companies: provisions of memorandum treated as provisions of articles).

Clause 18: Articles of association

65.     This clause replaces section 7 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 clause 19 (Power of Secretary of State to prescribe model articles), 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, companies limited by guarantee) will have the option of not registering articles but relying on the "relevant model articles" for that description of company.

66.     Articles must be contained in a single document and must be divided into consecutively numbered paragraphs.

Clause 19: Power of Secretary of State to prescribe model articles

67.     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.

68.     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 them.

69.     This clause (together with clause 20 (Default application of model articles)) replaces section 8 of the 1985 Act. It confers power on the Secretary of State to prescribe model articles for companies formed under the Bill. At present, of the various sets of model articles contained in the Companies (Tables A to F) Regulations 1985, only "Table A", which is prescribed for companies limited by shares (private and public), applies by default. In line with the CLR's recommendations, the Secretary of State will have the power to prescribe model articles, including "default" model articles, for different descriptions of companies (Company Formation and Capital Maintenance, paragraph 2.22).

70.     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 Bill comes into force, the "default" model articles will continue to be the Companies Act 1985 Table A ("Table A").

71.     Existing companies will be free to adopt, wholly or in part, the model articles prescribed for companies of a particular description formed under the Bill (see clause 19(3)). 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 Bill (with or without modifications) in place of the current Table A articles, or previous articles of its own devising. However, existing companies will also be free to retain their pre-Bill articles, whether or not they incorporate or are based on Table A or other model articles prescribed under pre-1985 Companies Acts.

72.     As with Table A, the adoption of model articles by companies formed under the Bill 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. They will also be able to adopt the provisions of model articles by reference.

73.     Adoption of the model articles by reference 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 the necessity of 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.

Clause 20: Default application of model articles

74.     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 the 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 Bill.

75.     At present section 8 of the 1985 Act provides that, in the case of a company limited by shares (but not any of the other types of company), if a company has not registered articles (or if articles are registered, in so far as they do not exclude or modify Table A), then Table A (so far as applicable and in force at the time of registration) will constitute the company's articles. Table A operates by default to plug any gaps in a company's articles. 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).

76.     This clause (with clause 19: Power of Secretary of State to prescribe model articles) replaces section 8 of the 1985 Act. It carries forward the principle that where companies of certain descriptions fail to make provision for a particular matter in their registered articles (or fail to register articles at all), then the relevant model articles should apply by default to that company in the same way that Table A currently applies to companies limited by shares (that is, to the extent that the company has not modified the corresponding provision in the model articles or excluded it from its registered articles). The clause extends this principle to other descriptions of limited companies, in particular, companies limited by guarantee.

77.     As now, where a company is using the model articles, the model articles that apply to the company are the model articles that applied to the company at the point of its formation. Thus where a company which is using the model articles changes its status, for example, from private limited by shares to public, the default position is that it remains subject to the same set of model articles as applied to it when the company was first formed and registered. However, there is nothing to stop it choosing to adopt provisions of the model articles prescribed for companies of the description to which it will belong after its change of status as part of changes to its articles which it may need or wish to make as part of the re-registration process.

Alteration of articles

Clause 21: Alteration of articles

78.     Subsection (1) provides that, as now, a company's articles can in general be amended by special resolution. This replaces an equivalent provision in section 9 of the 1985 Act.

79.     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.

Clause 22: Entrenched provisions of the articles

80.     This clause is a new provision which follows the recommendation of the CLR that the members of a company should be able to choose to entrench elements of the company's constitution in the articles (Final Report, paragraph 9.8). An "entrenched" provision is one that either may not be changed at all, or may only be changed if certain conditions are met. Provision for "entrenchment" may only be made on formation of a company or subsequently by unanimous consent of all of the company's members (see subsection (2)).

81.     This new entrenchment mechanism 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. As noted above (see note on clause 8: Memorandum of association), in future the memorandum will not serve this purpose.

Clause 23: Notice to registrar in case of entrenched provisions

Clause 24: Notice to registrar of removal of entrenched provisions

82.     Clause 23 (Notice to registrar in case of entrenched provisions) 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). There is a corresponding requirement as to notice in clause 24 (Notice to registrar of removal of entrenched provisions) where an entrenching provision is removed from a company's articles. When a company includes an entrenching provision in the articles other than on formation, or where it removes such a provision from the articles, the notice must be accompanied by a "statement of compliance" (see note on clause 13: Statement of compliance).

83.     The purpose of the provisions in clauses 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.

Clause 25: Effect of alteration of articles on company's members

84.     This clause replaces section 16 of the 1985 Act. The only difference is that section 16 also applies to alterations of a company's memorandum. A company formed under the Bill will not be able to (or need to) alter its memorandum.

85.     This clause retains the provision 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 give his written consent to such an alteration and, where he does, he will be bound by it.

Clause 26: Registrar to be sent copy of amended articles

86.     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.

87.     This clause replaces an equivalent provision in section 18(2) of the 1985 Act.

88.     Where a company fails to comply with the provisions of this clause, 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).

Clause 27: Registrar's notice to comply in case of failure with respect to amended articles

89.     This clause is a new provision. It gives the registrar a means of ensuring that companies comply with the obligation set out in clause 26 (Registrar to be sent copies of amended articles) without having to resort to criminal proceedings. (However, an offence of failing to file amended articles is retained: see subsection (3) of clause 26).

90.     Where the registrar becomes aware of any default in complying with clause 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, subsection (4) of clause 26).

Supplementary

Clause 28: Existing companies: provisions of memorandum treated as provisions of articles

91.     For companies formed under the Bill, the memorandum will contain limited information evidencing the intention 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 of the Bill: Company Formation). Subsection (1) of this clause provides that such material is to be treated for the future as part of the company's articles.

92.     Subsection (2) of this clause makes it clear that where the memorandum of an existing company contains an "entrenching provision" at the date that the Bill comes into force, this will be deemed, with effect from that date, to be an "entrenching provision" in the company's articles.

CHAPTER 3: RESOLUTIONS AND AGREEMENTS AFFECTING A COMPANY'S CONSTITUTION

93.     This Chapter replaces equivalent provisions in the 1985 Act on the registration of resolutions and agreements and on making these available to members.

Clause 29: Resolutions and agreements affecting a company's constitution

94.     This clause replaces section 380(4) of the 1985 Act. It lists the resolutions and agreements that must be forwarded to the registrar for registration and made available to members.

Clause 30: Copies of resolutions or agreements to be forwarded to and recorded by registrar

95.     This clause replaces subsections (1), (5) and (7) of section 380 of the 1985 Act.. Where a company passes a resolution or enters into an agreement of the type listed in clause 29 (Resolutions and agreements affecting a company's constitution), it must forward a copy of the resolution 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).

96.     Where an agreement or resolution 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.

Clause 31: Resolutions and agreements to be embodied in or attached to issued copies of articles

97.     This clause replaces subsections (2), (3) and (6) of section 380 of the 1985 Act. As now, where a resolution passed by the company's members or an agreement made by them affects the company's constitution, it should be embodied in or annexed to any copy of the articles that a company provides to its members.

CHAPTER 4: MISCELLANEOUS AND SUPPLEMENTARY PROVISIONS

Statement of company's objects

Clause 32: Statement of company's objects

98.     This clause 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. That 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 Bill a different approach is taken. Instead of companies being required to specify their objects, companies will have unlimited 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 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 alteration will not affect any rights or obligations of the company or render defective any legal proceedings by or against it.

102.     By virtue of subsection (4) the effect of this clause, for companies which are charities, 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)). 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.

103.     The directors of a company are under a duty to observe the company's constitution (see clause 157: Duty to act within powers) although restrictions in objects will, as now, have little effect outside of the internal workings of the company because of the effect of clause 39 (A company's capacity) and clause 40 (Power of directors to bind the company) (except in the case of charities where modified rules again apply - see clause 42: Constitutional limitations: companies that are charities).

Other provisions with respect to a company's constitution

Clause 33: Constitutional documents to be provided to members

104.     This clause replaces section 19 of the 1985 Act. It gives members the right to obtain from the company copies of the company's articles and certain other documents of constitutional importance.

105.     The other documents of constitutional significance are resolutions and agreements of the types listed in clause 29 (Resolutions and agreements affecting a company's constitution), the company's current certificate of incorporation, its current statement of capital (in the case of a company limited by shares) and its statement of guarantee (in the case of a company limited by guarantee).

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 dropped. 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 clause, the company and every officer of the company who is in default commits an offence. For the penalty for this offence see subsection (4).

Clause 34: Effect of company's constitution

108.     Subsection (1) of this clause 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 clause 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), clause 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. In other respects, this clause stays close to the traditional form of words for this provision. It is not intended to alter the existing principles, established by case law, as regards the nature and extent of the statutory contract between the company and its members.

109.     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.