INFORMAL VARIATION OF COMPANY CONSTITUTION

A recent case has demonstrated that a consistent course of conduct by directors and shareholders which is contrary to the express provisions in a company’s constitution may well result in an implied variation of the document, according to a corporate lawyer.

“A company’s articles of association may only be altered by a special resolution of the members, requiring a majority of at least 75%,” according to Philip Round, a partner based at George Green’s Wolverhampton office. “It is, however, a well-established principle of law that if all shareholders entitled to attend and vote at a general meeting assent to a matter, such assent is as binding as a resolution passed at a general meeting. The High Court recently considered the application of this principle in the context of a company with a sole director.”

Mr Round continues, “the case of Randhawa and others v Turpin and another concerned a company which had been placed into administration by its sole director. As part of an objection to the costs of the administration, certain creditors of the company argued that the appointment of the administrator was invalid because the board meeting had been inquorate.”

According to Mr Round, the company’s constitution stipulated that two directors had to be present in order for the board to transact business. “Unfortunately at the time of appointment of the administrator, the company had only one director and the decision to appoint the Administrator was taken by him acting alone.  Notwithstanding this, the Court found that there had been a consistent course of conduct under which the beneficial owner of 75% of the company’s share capital had informally sanctioned the exercise of powers by the sole director.  As the remaining shares were held by an Isle of Man company which had been dissolved, and no one could have voted those shares, it was held that all shareholders with voting rights had impliedly varied the company’s articles to allow the taking of decisions by a sole director. The administrator had therefore been validly appointed.”

Mr Round concludes, “whilst the decision is subject to appeal, it illustrates the fact that if shareholders depart from the express provisions of a company’s articles, and do so consistently over a period of time, it will be difficult for them to seek to enforce the strict terms of the company’s articles at a later date. In order to avoid uncertainty, it is, of course, always preferable to keep the constitutional documents under review and to ensure that they reflect the company’s requirements from time to time.”