Companies Law: the Directors Under Table A of Companies Act 2006 - Research Paper Example

Introduction The new Companies Act 2006 was promulgated to change the rules and regulations regarding the companies and make them more suitable to the current business environment1. With these changes, there were also efforts by the government regarding changing the Table A and bringing forth the new set of model articles which are mostly in line with the provisions of the new act. The Companies (Model Articles) Regulations 2008 (SI 2008/3229) are the new set of regulations containing the model articles and will be applied to all the companies incorporate after 1st October 2009. It is important to note that the model articles for Private firms are different as compared to the Public Limited Companies whereas there is also a further classification of the articles based on the Companies limited by Shares and Companies Limited by Guarantee. It is important to note that most of these articles are almost same as they were outlined in the Table A under the Companies Act 1985. It is therefore often argued that the new model articles may not serve the purpose as more and more firms will not be converting to the new set of model articles. Further the recent case laws on the Section 994 of Companies Act further render the effectiveness of Model Articles as ineffective. “The model articles for private companies (set out in SI 2008/3229) are unlikely to make any significant difference to the way that English companies operate for a number of reasons. Firstly, they are very similar in effect to Table A, so companies which already have Table A articles will not wish to go through all the time, trouble and expense of changing their existing articles. Secondly, although the articles are relevant to how a private company is run, the effect of recent case law on s 994 Companies Act 2006 means that their importance has been diminished.” This paper will therefore attempt to discuss and present detailed analysis of above statement by providing reference to the various case studies pertaining specially to Section 459 and Section 994 of the Companies Act 2006. Articles of Association Articles of Association or generally Articles of any company actually set out the procedural rules and regulations which are followed by the organizations. The articles of association of a company contains information about the company, its directors as well as set out the operational rules and regulations considered as necessary for the overall conduct of business. It is because of this reason that the articles of association are considered as one of the basic requirements for the formation of any company. As such what is also critical to understand that every organization is free to prepare its own articles of Association as long as they are prepared in accordance with the law? However, law also provides an option to follow a standard set of articles outlined under Table A in Companies Act 1985. The model articles provide a ready to get articles of association which can be implemented without incurring much cost and following through complicated procedure of drafting and preparation of customized set of articles of association. Table-A Table-A of the Companies Act 1985 provides a set of model articles of association for UK firms to follow if they do not wish to develop their own set of articles of association.2 It is important to note that Table A is in force since 19th Century and has continuously been revised and updated in order to make changes according to the new business dynamics. The current Table A is in force since 1985 which has subsequently been updated also with the introduction as well as deletion of new articles. It applies to all the companies incorporate before October 1, 2009 and is subsequently replaced by the model articles for private companies (set out in SI 2008/3229). Further, it also needs to be clarified that the Table-A is still valid for the companies that were incorporated under the Companies Act 1985 and will continue to serve the Companies which were incorporate under the 1985 act whereas the new set of rules will apply to companies incorporate after Oct 1, 2009. One of the important benefits of having Table-A is the fact that it provides a ready to made solution for having an effective set of articles which effectively set out the rules and regulations of the organization according to the Companies Act. Further, Table-A is mostly suited for the Companies limited by Shares however, there are also model set of articles for the companies limited by Guarantee also. Companies that are not explicitly registered under the Companies regulations however, are allowed to register themselves under the regulations are not usually required to file Table A however, if they wish to they can do so by adapting a special resolution. “When a company limited by shares is incorporated, it does not need to file Articles if it wishes to use Table A as its Articles. In this case, if you search the records of a company limited by shares you may not find a document setting out its Articles. Certain provisions of Table A may also apply to a company which has filed Articles, if the company’s Articles have not specifically excluded or modified Table A. In either case, if you want to see the regulations that govern the management of the company, you need to refer to the relevant Table A.”(Companieshouse.gov.uk, 2010). The above description indicate that the certain sections or articles of the Table A also apply to the companies which file their own articles of association therefore in a sense, Table A not only provides a readymade solution for the companies which do not wish to submit their own articles of association. It is important to note that the Table A under Companies Act 1985 carried 118 different articles which are considered as model articles and describe various procedures necessary to put a company in working conditions as the model articles outline what a company can legally do and how it can run itself according to the existing rules and regulations under the Companies Act. One of the significant issues that is often in conflict with the case laws and the Table A under Companies Act 1985 is the power of the Directors3. Table A assumes that the Directors of the firm are basically responsible for the day to day operations of the companies whereas shareholders can occasionally act to assist the Directors on specific issues. The model Articles therefore creates an inherent conflict between the powers of the shareholders and the Directors. With the increase in focus on the corporate governance and renewed call for curtailing or rationalizing the powers of the Directors, it has became one of the significant issues that the powers of shareholders as well as the Directors must be balanced in such a manner that they allow a better functioning of the company. “The Decision in John Shaw & Sons v. Shaw The balance of power between shareholders and Directors under Table A reflects a long-standing rule in UK law whereby the Directors cannot be prevented from running the company in the best way possible. In the case of John Shaw & Sons (Salford) Ltd v. Shaw [1935] 2 KB 113, Greer LJ summed up his decision to refuse to give effect to an instruction from the companys shareholders by quoting from the 11th edition of Buckley on Companies: “...these words [of the then extant equivalent companies act] do not enable the shareholders, by resolution passed at a general meeting without altering the articles, to give directions to the directors as to how the companys affairs are to be managed, nor to overrule any decision come to by the directors in the conduct of its business”(Robinson, 2010). The above ruling very vividly reflected upon as to how the dominance of Directors over the day to day operations of the company shall be managed and as such shareholders, without altering the articles of association of the company can instruct the directors to manage the affairs of the firm in certain specific manner. Section 459 to 461 therefore deals with the shareholder prejudice as under the Table A, the Directors assumes relatively higher powers as compared to the Shareholders and Shareholders can only act under certain conditions. Under Section 459, a shareholder can approach the court for the prejudice however, in most of the cases, court often orders the Company or the Directors to purchase the shares of the aggrieved shareholder at the agreed fair value which may either be mutually agreed between the parties or determined by the court. Thus effectively, case law hardly provides any significant relief to the shareholders under Section 459. New Table-A With the phased introduction of new changes into the companies act 2006, existing companies were required to review their articles of association to make them in accordance with the Companies act 2006 in situations wherein there were direct and explicit mention of the Companies act 1985 because it was replaced with new Companies Act 20064. The overall approach was to update the new Table-A according to the changes made in the Companies Act 2006. Key Changes Following quoted text identifies the key changes that took place after the introduction of the new regulations: “The key changes are: There will be two versions of Table A – one for private and one for public companies. A new definition of "the Acts" to include both the 1985 and 2006 Companies Acts. For a private company only, the deletion of regulation 36, which requires any general meeting other than an AGM to be called an “extraordinary” general meeting? As a result, new companies will hold general meetings, not EGMs, in line with the Act. The deletion from regulation 38 of the requirement for 21 days notice if a special resolution is passed, as the notice period for meetings in the Act is not dependent on the type of resolution being passed, and for private companies is set at 14 days. Regulation 53 – resolutions in writing - is deleted for both public and private companies. Only private companies will be able to pass written resolutions under the new procedure in the Act. All references to AGMs are deleted in the version for private companies, together with the director retirement by rotation provisions in regulations 73 to 75. The reference in regulation 117 to an extraordinary resolution for winding up is replaced by a special resolution. These new versions of Table A only apply to companies incorporated on or after 1 October 2007, and in October 2008 will be replaced by the new model form articles. BERR have indicated that "it is possible, although unlikely, that there will be a further amendment in April 2008 to reflect other provisions of the Companies Act 2006 brought into force at that point."”(Oswalds,2010). The above points indicate that there are very few changes that practically distinguish the new Table A from the older one and as such there are lot of similarities also between the two tables. Similarities and Differences The New Companies Act 2006 almost provided the same rights to the Directors for running the day to day affairs of the firm. However, it also allowed shareholders to direct the Directors of the company to perform certain specific tasks by passing a special resolution. Special resolution can only become effective if it is approved with 75% of the majority. It is argued that the new Table A has been revised in accordance with the changes made in the Companies Act 2006. However, there are still various similarities between the two tables. New Table A has been divided into five parts with 53 sections/articles whereas the Table A under Companies Act 1985 contains 118 different model articles/sections to outline the different rules and procedures to be adapted by a firm. The various changes that have been introduced under the Companies Act 2006 carry significant importance because they basically outline as to how the private companies are run. What is also however, critical to note that the new Table A came into force during 2009 and as such the different case laws have practically rendered the effectiveness of new Table A as unimportant. These new changes are also considered as less significant because they have not fundamentally changed the overall structure of the old Table-A. Section 994 Section 994 of the Companies Act 2006 is the identical successor of the Section 459 of the Companies Act 1985 and deals with the prejudice and allows a shareholder to file a petition in the court of law for any prejudice. Sub- Section 1 of Section 994 indicates following: “Petition by company member (1) A member of a company may apply to the court by petition for an order under this Part on the ground— (a) that the companys affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) That an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” (Companies Act 2006) The above section therefore clearly indicates that the members of the company have the legal right to go to the court regarding any prejudice charged against the shareholders. The above section also provides powers to the minority shareholders to significantly challenge the actions of the majority shareholders however; the ultimate remedy available is limited only up to the selling of the shares to the majority shareholders. What is also significant to note that under Section 994, majority shareholders cannot force the minority shareholders to sell their holdings therefore majority shareholders cannot effectively take benefit of the section 994 until it is explicitly provided by the Court after minority shareholders submit their petition for unfair prejudice. In Rock Nominees Ltd v RCO (Holdings) plc [2004]5 it was decided by the court that the members can only complain regarding the conduct however, conduct needs to be both prejudicial as well as unfair.(Sealey & Worthington,2007). This decision therefore set forth one of the most important examples of the way companies tend to operate within UK and provided the relative support to the notion that the Directors of the company must be responsible for the day to day operations of the Company. The complains regarding any prejudice therefore shall be against the conduct of the company and not the Directors therefore the proof of burden rest on the members to provide the necessary evidence that the overall conduct of company may prejudice the interest of the shareholders. Importance of Table-A The case laws on the Section 459 and Section 994 reflects that the model articles that outline the roles and responsibilities of the Directors may be in direct contravention with the each other. This is because of the fact that Table A provides certain specific powers to the Directors regardless of the fact that such powers may be violated and the minority shareholders specially may suffer due to this. This also means that practically Table A does not provide relatively better benefits to the companies to shift towards new Table A or new companies to adapt it in its entirety. First, most of the articles are almost same therefore it would be relatively more costly for the companies to switch to the new Table- A. Though the companies have the option to stick to the old Table A under Companies Act 1985 however, new companies may find it relative less interesting to adapt Table A. Further, under model Articles, the minimum quorum for Directors’ meeting is two however, Companies Act 2006 allow the formation of a company by just one director only. Thus there are some inherent contradiction between the model articles and the Act itself The general authority given to the Directors under Table A of Companies Act 2006 is almost same as it was in earlier Table however; it also further provides the option to the members to pass an special resolution to refrain the directors from doing something. What is also interesting to note that special resolution however, does not reverses what has already been done by the Directors. As such there is a very little difference between the two set of rules and companies will therefore not finding it relatively more beneficial to adapt to the new set of rules proposed under Table A. Conclusion Companies Law was changed and replaced by Companies Act 2006 and with the change in the law, Table A was also changed and updated to make it align with the changes made into the Companies Act. The set of model articles proposed under the new Table A however, are not relatively different from the earlier set of model articles outlined in Table A given in Companies Act 1985. The new Table A will not be applicable to the companies registered under Companies Act 1985 however; it will apply to all the companies which have been registered after Oct 1, 2009. The new set of rules as proposed under the new Table A are not relatively different from the earlier version therefore it may not be attractive for the companies to change to the new set of rules and adapt new model articles because existing set of rules are sufficient to practically allow companies to smoothly run their affairs. The section 994 which is exact identical to the Section 459 of Companies Act 1985 provides relief to the members to go to the courts if they believe that the company is acting in such a manner that it is prejudice to the interest of the members. This is contravention to the fact that New and Old Table A provides explicit powers to the Directors of the Company to perform day to day operations of the firm and allowing shareholders only to act under certain conditions. Companies Act 2006 allows the members to restrict the directors from taking certain specific action by passing a special resolution. However, courts mostly allow the company or majority shareholders to purchase the shareholding of the aggrieved members. References 1. Companies Act 2006 2. Table A [online]. (2010) [Accessed 31 April 2010]. Available from: . 3. Robinson, Z (2010). How Far Can Shareholders Instruct Directors? [online]. [Accessed May 3, 2010]. Available from: . 4. Sealy, L, Worthington, S (2007). Cases and Materials in Company Law. 8th. ed. London: Oxford University Press. 5. Oswalds (2010). Articles of Association after 1 October 2007 [online]. [Accessed 30 April 2010]. Available from: . Read More