CHAPTER 15 CONSTITUTION OF A COMPANY

CHAPTER 15 CONSTITUTION OF A COMPANY

INTRODUCTION

The articles of association is one of the documents that may be required to be

submitted to the Registrar when applying for registration. The articles, together

with any resolutions and agreements which may affect them, form the

company's constitution.

The constitution sets out what the company does; if there are no restrictions

specified then the company may do anything provided it is legal. Clearly this

includes the capacity to contract, an important aspect of legal personality. Also

significant is the concept of ultra vires, a term used to describe transactions

that are outside the scope of the company's capacity.

Study guide

Intellectual level

D The formation and constitution of business organisations

4 Company formations

(d) Describe the contents of model articles of association 1

(e) Analyse the effect of a company's constitutional documents 2

(f) Explain how articles of association can be changed 2

(g) Explain the controls over the names that companies may or may not use 2

Exam guide

A company's constitution could easily be examined in either a knowledge or an application question. You

may be asked to explain any of the constitutional documents and how they may be altered.

1 Memorandum of association

The memorandum is a simple document which states that the subscribers wish to form a company and

become members of it.

Before the Companies Act 2006, the memorandum of association was an extremely important document

containing information concerning the relationship between the company and the outside world – for

example its aims and purpose (its objects).

The position changed with the 2006 Act and much of the information contained in the old memorandum is

now to be found in the Articles of Association, which we will come to shortly. The essence of the

memorandum has been retained, although it is now a very simple historical document which states that

the subscribers (the initial shareholders):

(a) Wish to form a company under the Act, and

(b) Agree to become members of the company and, to take at least one share each if the company is

to have share capital.

The memorandum must be in the prescribed form and must be signed by each subscriber.

It has been deemed by the Companies Act 2006 that companies which were incorporated under a

previous Act and whose memorandum contains provisions now found in the articles, shall have these

provisions interpreted as if they are part of the articles.

2 A company's constitution

A company's constitution comprises the Articles of Association and any resolutions and agreements it

makes which affect the constitution.

According to s 17 of the Companies Act 2006, the constitution of a company consists of:

• The Articles of Association

• Resolutions and agreements that it makes that affects the constitution

We shall consider resolutions and agreements first. This will help explain how the Articles of Association

are amended.

2.1 Resolutions and agreements

In addition to the main constitutional document (the Articles of Association), resolutions and agreements

also form part of a company's constitution.

Resolutions are decisions passed by members which directly affect the company's constitution as they

are used to introduce, amend or remove provisions in the articles. Agreements made, for example

between the company and members, are also deemed as amending the constitution.

Copies of resolutions or agreements that amend the constitution must be sent to the Registrar within 15

days of being passed or agreed. If a company fails to do this then every officer who is in default commits

an offence punishable by fine. Where a resolution or agreement which affects a company's constitution is

not in writing, the company is required to send the registrar a written memorandum that sets out the

terms of the resolution or agreement in question.

2.2 Articles of Association

The articles of association consist of the internal rules that relate to the management and administration

of the company.

The articles contain detailed rules and regulations setting out how the company is to be managed and

administered. The Act states that the registered articles should be contained in a single document which

is divided into consecutively numbered paragraphs. Articles should contain rules on a number of areas,

the most important being summarised in the table below.

CONTENTS OF ARTICLES

Appointment and dismissal of directors -- Communication with members

Powers, responsibilities and liabilities of directors -- Class meetings

Directors' meetings -- Issue of shares

General meetings; calling, conduct and voting -- Transfer of shares

Members' rights -- Documents and records

Dividends -- Company secretary

2.2.1 Model articles

Rather than each company having to draft their own articles, and to allow companies to be set up quickly

and easily, the Act allows the Secretary of State to provide model (or standard) articles that companies

can adopt. Different models are available for different types of company; most companies would adopt

model private or public company articles.

Companies are free to use any of the model articles that they wish to by registering them on incorporation.

If no articles are registered then the company will be automatically incorporated with the default model

articles which are relevant to the type of company being formed. Model articles can be amended by the

members and therefore tailored to the specific needs of the company.

Model articles are effectively a 'safety net' which allow directors and members to take decisions if the

company has failed to include suitable provisions in its registered articles or registered no articles at all.

The following summarises the model articles for a private limited company. Do not try to learn the

contents but use it to understand the type of information contained in them. We shall cover a number of

the draft articles later in this Study Text.

Model articles for private companies limited by shares

Index to the articles

Part 1 Definitions and interpretation

1. Defined terms

2. Liability of members

Part 2 Directors

Directors' powers and responsibilities

3. Directors' general authority

4. Shareholders' reserve power

5. Directors may delegate

6. Committees

Decision-making by directors

7. Directors to take decisions collectively

8. Unanimous decisions

9. Calling a directors' meeting

10. Participation in directors' meetings

11. Quorum for directors' meetings

12. Chairing of directors' meetings

13. Casting vote

14. Conflicts of interest

15. Records of decisions to be kept

16. Directors' discretion to make further rules

Appointment of directors

17. Methods of appointing directors

18. Termination of director's appointment

19. Directors' remuneration

20. Directors' expenses

Part 3 Shares and distributions

Shares

21. All shares to be fully paid up

22. Powers to issue different classes of share

23. Company not bound by less than absolute interests

24. Share certificates

25. Replacement share certificates

26. Share transfers

27. Transmission of shares

28. Exercise of transmittees' rights

29. Transmittees bound by prior notices

Dividends and other distributions

30. Procedure for declaring dividends

31. Payment of dividends and other distributions

32. No interest on distributions

33. Unclaimed distributions

34. Non-cash distributions

35. Waiver of distributions

Capitalisation of profits

36. Authority to capitalise and appropriation of capitalised sums

Part 4 Decision-making by shareholders

Organisation of general meetings

37. Attendance and speaking at general meetings

38. Quorum for general meetings

39. Chairing of general meetings

40. Attendance and speaking by directors and non-shareholders

41. Adjournment

Voting at general meetings

42. Voting: general

43. Errors and disputes

44. Poll votes

45. Content of proxy notices

46. Delivery of proxy notices

47. Amendments to resolutions

Part 5 Administrative arrangements

48. Means of communication to be used

49. Company seals

50. No right to inspect accounts and other records

51. Provision for employees on cessation of business

Directors' indemnity and insurance

52. Indemnity

53. Insurance

Alteration of the articles 12/08

The articles may be altered by a special resolution. The basic test is whether the alteration is for the

benefit of the company as a whole.

Any company has a statutory power to alter its articles by special resolution: s 21. A private company

may pass a written resolution with a 75% majority. The alteration will be valid and binding on all

members of the company. Copies of the amended articles must be sent to the Registrar, within 15 days of

the amendment, taking effect.

2.2.3 Making the company's constitution unalterable

There are devices by which some provisions of the company's constitution can be made unalterable

unless the member who wishes to prevent any alteration consents.

(a) The articles may give a member additional votes so that he can block a resolution to alter articles

on particular points (including the removal of his weighted voting rights from the articles): Bushell

v Faith 1970. However, to be effective, the articles must also limit the powers of members to alter

the articles that give extra votes.

(b) The articles may provide that when a meeting is held to vote on a proposed alteration of the articles

the quorum present must include the member concerned. They can then deny the meeting a

quorum by absenting themselves.

(c) Section 22 of the Act permits companies to 'entrench' provisions in its articles. This means

specific provisions may only be amended or removed if certain conditions are met which are more

restrictive than a special resolution such as agreement of all the members. However, such

'entrenched provisions' cannot be drafted so that the articles can never be amended or removed.

2.2.4 Restrictions on alteration 12/08

Even when it is possible to hold a meeting and pass a special resolution, alteration of the articles is

restricted by the following principles.

(a) The alteration is void if it conflicts with the Companies Act or with general law.

(b) In various circumstances, such as to protect a minority (s 994), the court may order that an

alteration be made or, alternatively, that an existing article shall not be altered.

(c) An existing member may not be compelled by alteration of the articles to subscribe for additional

shares or to accept increased liability for the shares which they hold unless they have given their

consent: s 25.

(d) An alteration of the articles which varies the rights attached to a class of shares may only be made if

the correct rights variation procedure has been followed to obtain the consent of the class: s 630. A

15 per cent minority may apply to the court to cancel the variation under s 633.

(e) A person whose contract is contained in the articles cannot obtain an injunction to prevent the

articles being altered, but they may be entitled to damages for breach of contract: Southern

Foundries 1926 Ltd v Shirlaw 1940 . Alteration cannot take away rights already acquired by

performing the contract.

(f) An alteration may be void if the majority who approve it are not acting bona fide in what they

deem to be the interests of the company as a whole (see below).

The case law on the bona fide test is an effort to hold the balance between two principles:

(a) The majority are entitled to alter articles even though a minority considers that the alteration is

prejudicial to its interests.

(b) A minority is entitled to protection against an alteration which is intended to benefit the majority rather

than the company and which is unjustified discrimination against the minority.

Principle (b) tends to be restricted to cases where the majority seeks to expel the minority from the

company.

The most elaborate analysis of this subject was made by the Court of Appeal in the case of Greenhalgh v

Arderne Cinemas Ltd 1950. Two main propositions were laid down by Evershed MR.

(a) 'Bona fide for the benefit of the company as a whole' is a single test and also a subjective test

(what did the majority believe?). The court will not substitute its own view.

(b) 'The company as a whole' means, in this context, the general body of shareholders. The test is

whether every 'individual hypothetical member' would in the honest opinion of the majority benefit

from the alteration.

If the purpose is to benefit the company as a whole the alteration is valid even though it can be shown that

the minority does in fact suffer special detriment and that other members escape loss. In Allen v Gold

Reefs of West Africa Ltd 1900 the articles were altered to extend the company's lien from just partly paid

shares to all shares. In fact only one member held fully paid shares. The court overruled his objections on

the grounds that:

• The alteration was for the benefit of the company as a whole and applied to any member who held

fully paid shares.

• The members held their shares subject to the constitution, and hence were subject to any

changes to those documents.

2.2.5 Expulsion of minorities 12/08

Expulsion cases are concerned with:

• Alteration of the articles for the purpose of removing a director from office

• Alteration of the articles to permit a majority of members to enforce a transfer to themselves of the

shareholding of a minority

The action of the majority in altering the articles to achieve 'expulsion' will generally be treated as valid

even though it is discriminatory, if the majority were concerned to benefit the company or to remove

some detriment to its interests.

If on the other hand the majority was blatantly seeking to secure an advantage to themselves by their

discrimination, the alteration made to the articles by their voting control of the company will be invalid.

The cases below illustrate how the distinctions are applied in practice.

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd 1927

The facts: Expulsion of director appointed by the articles who had failed to account for funds was held to

be valid.

Sidebottom v Kershaw, Leese & Co Ltd 1920

The facts: The articles were altered to enable the directors to purchase at a fair price the shareholding of

any member who competed with the company in its business. The minority against whom the new article

was aimed did carry on a competing business. They challenged the validity of the alteration on the ground

that it was an abuse of majority power to 'expel' a member.

Decision: There was no objection to a power of 'expulsion' by this means. It was a justifiable alteration if

made bona fide in the interests of the company as a whole. On the facts this was justifiable.

Brown v British Abrasive Wheel Co 1919

The facts: The company needed further capital. The majority who held 98 per cent of the existing shares

were willing to provide more capital but only if they could buy up the 2 per cent minority. As the minority

refused to sell, the majority proposed to alter the articles to provide for compulsory acquisition on a fair

value basis. The minority objected to the alteration.

Decision: The alteration was invalid since it was merely for the benefit of the majority. It was not an

alteration 'directly concerned with the provision of further capital' and therefore not for the benefit of the

company.

Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd 1920

The facts: The claimant was a minority shareholder which had transferred its custom from the defendant

company to another supplier. The majority shareholders of the defendant company sought to protect their

interests by altering the articles to provide for compulsory acquisition of the claimant's shares.

The new article was not restricted (as it was in Sidebottom's case above) to acquisition of shares on

specific grounds where benefit to the company would result. It was simply expressed as a power to

acquire the shares of a member. The claimant objected that the alteration was invalid since it was not for

the benefit of the company.

Decision: The alteration was invalid because it 'enables the majority of the shareholders to compel any

shareholder to transfer his shares'. This wide power could not 'properly be said to be for the benefit of the

company'. The mere unexpressed intention to use the power in a particular way was not enough.

Therefore if the majority intend that the power to acquire the shares of a minority is to be restricted to

specific circumstances for the benefit of the company, they should ensure that this restriction is included

in the new article.

Scenario questions on this area of law may concern a majority wishing to amend the company's articles to

allow the expulsion of a minority (as in December 2008).

If this is the case, pay close attention to the resolution as it may be invalid under one of the cases above.

QUESTION

Articles of Association

Explain the nature of the model articles of association under the Companies Act 2006.

ANSWER

The model articles are a single document containing model rules and regulations concerning the

management and administration of a company.

2.2.6 Filing of alteration

Whenever any alteration is made to the articles a copy of the altered articles must be delivered to the

Registrar within 15 days, together with a signed copy of the special resolution making the alteration.

2.2.7 Interaction of statute and articles

There are two aspects to consider.

(a) The Companies Act may permit companies to do something if their articles also authorise it. For

example a company may reduce its capital if its articles give power to do this. If, however, they do

not, then the company must alter the articles to include the necessary power before it may

exercise the statutory power.

(b) The Companies Act will override the articles:

(i) If the Companies Act prohibits something

(ii) If something is permitted by the Companies Act only by a special procedure (such as

passing a special resolution in general meeting)

3 Company objects and capacity

A company's objects are its aims and purposes. If a company enters into a contract which is outside its

objects, that contract is said to be ultra vires. However the rights of third parties to the contract are

protected.

3.1 The objects

The objects are the 'aims' and 'purposes' of a company. Under previous companies legislation they were

held in a specific clause within the memorandum of association. This clause set out everything the

company could do, including being a 'general commercial company' which meant it could pretty much do

anything.

The 2006 Act changed matters. The objects could now be found in the articles but most articles will not

mention any objects. This is because under the Act a company's objects are completely unrestricted (ie it

can carry out any lawful activity). Only where the company wishes to restrict its activities is there an

inclusion of those restrictions in the articles: s 31.

3.1.1 Alteration of the objects

As a company's objects are located in its articles it may, under s 21, alter its objects by special resolution

for any reason. The procedure is the same as for any other type of alteration.

3.2 Contractual capacity and ultra vires

Companies may only act in accordance with their objects. If the directors permit an act which is restricted

by the company's objects then the act is ultra vires.

Ultra vires is where a company exceeds its objects and acts outside its capacity.

Companies which have unrestricted objects are highly unlikely to act ultra vires since their constitution

permits them to do anything. Where a company has restrictions placed on its objects and it breaches

these restrictions then it would be acting ultra vires.

Ashbury Railway Carriage & Iron Co Ltd v Riche 1875

The facts: The company had an objects clause which stated that its objects were to make and sell, or lend

on hire, railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock;

and to carry on business as mechanical engineers. The company bought a concession to build a railway in

Belgium, subcontracting the work to the defendant. Later the company repudiated the contract.

Decision: Constructing a railway was not within the company's objects so the company did not have

capacity to enter into either the concession contract or the sub-contract. The contract was void for ultra

vires and so the defendant had no right to damages for breach. The members could not ratify it and the

company could neither enforce the contract nor be forced into performing its obligations.

The approach taken by the Companies Act 2006 is to give security to commercial transactions for third

parties, whilst preserving the rights of shareholders to restrain directors from entering an ultra vires

action.

S 39 provides as follows:

'the validity of an act done by a company shall not be called into question on the ground of lack of capacity

by reason of anything in the company's constitution.'

S 40 provides as follows:

'in favour of a person dealing with a company in good faith, the power of the directors to bind the

company, or authorise others to do so, shall be deemed to be free of any limitation under the company's

constitution.'

There are a number of points to note about s 40.

(a) The section applies in favour of the person dealing with the company, it does not apply to the

members.

(b) In contrast with s 39 good faith is required on the part of the third party. The company has,

however, to prove lack of good faith in the third party and this may turn out to be quite difficult:

s 40(2).

(c) The third party is not required to enquire whether or not there are any restrictions placed on the

power of directors: s 40(2). They are free to assume the directors have any power they profess to

have.

(d) The section covers not only acts beyond the capacity of the company, but acts beyond 'any

limitation under the company's constitution'.

Whilst sections 39 and 40 deal with the company's transactions with third parties, the members may take

action against the directors for permitting ultra vires acts. Their action will be based on the fact that the

objects specifically restricted the particular act and under section 171, the directors must abide by the

company's constitution.

The main problem for members is that they are most likely to be aware of the ultra vires act only after it

has occurred. Therefore they are not normally in a position to prevent it, although in theory they could

seek an injunction if they found out about the potential ultra vires act before it took place.

QUESTION  Capacity to contract

Describe how a company's capacity to contract can be regulated and what third parties may assume when

entering into a contract with the company.

Answer

A company's capacity to contract is regulated by its members passing resolutions which restrict its

objects. Under section 40(2) of the Act, third parties can assume the directors have the necessary power

to authorise the act.

Make sure you understand how s 39 and s 40 protect third parties.

3.3 Transactions with directors

S 41 of the Companies Act 2006 applies when the company enters into a contract with one of its

directors, or its holding company, or any person connected with such a director. Contracts made between

the company and these parties are voidable by the company if the director acts outside their capacity.

Whether or not the contract is avoided, the party and any authorising director is liable to repay any profit

they made or make good any losses that result from such a contract.

4 The constitution as a contract

The articles constitute a contract between:

• Company and members

• Members and the company

• Members and members

The articles do not constitute a contract between the company and third parties, or members in a

capacity other than as members (the Eley case).

4.1 Effect

A company's constitution bind, under s 33:

• Members to company

• Company to members

• Members to members

The company's constitution does not bind the company to third parties.

This principle applies only to rights and obligations which affect members in their capacity as members.

Hickman v Kent or Romney Marsh Sheepbreeders Association 1915

The facts: The claimant (H) was in dispute with the company which had threatened to expel him from

membership. The articles provided that disputes between the company and its members should be

submitted to arbitration. H, in breach of that article, began an action in court against the company.

Decision: The proceedings would be stayed since the dispute (which related to matters affecting H as a

member) must, in conformity with the articles, be submitted to arbitration.

The principle that only rights and obligations of members are covered by s 33 applies when an outsider

who is also a member seeks to rely on the articles in support of a claim made as an outsider.

Eley v Positive Government Security Life Assurance Co 1876

The facts: E, a solicitor, drafted the original articles and included a provision that the company must

always employ him as its solicitor. E became a member of the company some months after its

incorporation. He later sued the company for breach of contract in not employing him as its solicitor.

Decision: E could not rely on the article since it was a contract between the company and its members and

he was not asserting any claim as a member.

The members are able to compel the company to obey the Articles: Pender v Lushington 1877.

4.2 Constitution as a contract between members

S 33 gives to the constitution the effect of a contract made between (a) the company and (b) its members

individually. It can also impose a contract on the members in their dealings with each other.

Rayfield v Hands 1958

The facts: The articles required that (a) every director should be a shareholder and (b) the directors must

purchase the shares of any member who gave them notice of his wish to dispose of them. The directors,

however, denied that a member could enforce the obligation on them to acquire his shares.

Decision: There was 'a contract ... between a member and member-directors in relation to their holdings

of the company's shares in its articles' and the directors were bound by it.

Articles and resolutions are usually drafted so that each stage is a dealing between the company and the

members, to which s 33 clearly applies, so that:

(a) A member who intends to transfer his shares must, if the articles so require, give notice of his

intention to the company.

(b) The company must then give notice to other members that they have an option to take up his

shares.

4.3 Constitution as a supplement to contracts

The constitution can be used to establish the terms of a contract existing elsewhere.

If an outsider makes a separate contract with the company and that contract contains no specific term on

a particular point but the constitution does, then the contract is deemed to incorporate the constitution to

that extent. One example is when services, say as a director, are provided under contract without

agreement as to remuneration: Re New British Iron Co, ex parte Beckwith 1898.

If a contract incorporates terms of the articles it is subject to the company's right to alter its articles:

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd 1927. However a company's articles cannot be altered to

deprive another person of a right already earned, say for services rendered prior to the alteration.

Remember the articles only create contractual rights/obligations in relation to rights as a member.

4.4 Shareholder agreements

Shareholders' agreements sometimes supplement a company's constitution.

Shareholder agreements are concerned with the running of the company; in particular they often contain

terms by which the shareholders agree how they will vote on various issues.

They offer more protection to the interests of shareholders than do the articles of association. Individuals

have a power of veto over any proposal which is contrary to the terms of the agreement. This enables a

minority shareholder to protect his interests against unfavourable decisions of the majority.

Question Constitution

State the parties who are bound by a company's articles.

Answer

The company is bound to the members, the members to the company and the members to the other

members in their capacity as members.

5 Company name and registered office

Except in certain circumstances a company's name must end with the words limited (Ltd), public limited

company (plc) or the Welsh equivalents.

A company's name is its identity. There are a number of rules which restrict the choice of name that a

company may adopt.

5.1 Statutory rules on the choice of company name 6/09

No company may use a name which is:

– The same as an existing company on the Registrar's index of company names

– A criminal offence, offensive, or ‘sensitive'

– Suggest a connection with the government or local authority (unless approved)

The choice of name of a limited company must conform to the following rules.

(a) The name must end with the word(s):

(i) Public limited company (abbreviated plc) if it is a public company

(ii) Limited (or Ltd) if it is a private limited company, unless permitted to omit 'limited' from its

name

(iii) The Welsh equivalents of either (i) or (ii) may be used by a Welsh company

(b) No company may have a name which is the same as any other company appearing in the statutory

index at Companies House. For this purpose two names are treated as 'the same' in spite of minor

or non-essential differences. For instance the word 'the' as the first word in the name is ignored.

'John Smith Limited' is treated the same as 'John Smith' (an unlimited company) or 'John Smith &

Company Ltd'. Where a company has a name which is the same or too similar to another, the

Secretary of State may direct the company to change its name.

(c) No company may have a name the use of which would be a criminal offence or which is

considered offensive or 'sensitive' (as defined by the Secretary of State).

(d) Official approval is required for a name which in the Registrar's opinion suggests a connection

with the government or a local authority or which is subject to control.

A name which suggests some professional expertise such as 'optician' will only be permitted if the

appropriate representative association has been consulted and raises no objection.

The general purpose of the rule is to prevent a company misleading the public as to its real

circumstances or activities. Certain names may be approved by the Secretary of State on written

application.

5.2 Omission of the word 'limited'

A private company which is a charity or a company limited by shares or guarantee and licensed to do so

before 25 February 1982 may omit the word 'limited' from its name if the following conditions are satisfied.

(a) The objects of the company must be the promotion of either commerce, art, science, education,

religion, charity or any profession (or anything incidental or conducive to such objects).

(b) The memorandum or articles must require that the profits or other income of the company are to

be applied to promoting its objects and no dividends or return of capital may be paid to its

members. Also on liquidation the assets (otherwise distributable to members) are to be

transferred to another body with similar objects. The articles must not then be altered so that the

company's status to omit ‘Limited' is lost.

5.3 Change of name

A company may decide to change its name by:

(a) Passing a special resolution

(b) By any other means provided for in the articles (in other words the company can specify its own

procedure for changing its name).

Where a special resolution has been passed, the Registrar should be notified and a copy of the resolution

sent. If the change was made by any other procedure covered by (b), the Registrar should be notified and

a statement provided which states that the change has been made in accordance with the articles.

The change is effective from when a new incorporation certificate is issued, although the company is still

treated as the same legal entity as before. The same limitations as above apply to adoption of a name by

change of name as by incorporation of a new company.

5.4 Passing-off action 6/09

A person who considers that their rights have been infringed can apply for an injunction to restrain a

company from using a name (even if the name has been duly registered). It can do this if the name

suggests that the latter company is carrying on the business of the complainant or is otherwise connected

with it.

A company can be prevented by an injunction issued by the court in a passing-off action from using its

registered name, if in doing so it causes its goods to be confused with those of the claimant.

Ewing v Buttercup Margarine Co Ltd 1917

The facts: The claimant had since 1904 run a chain of 150 shops in Scotland and the north of England

through which he sold margarine and tea. He traded as 'The Buttercup Dairy Co'. The defendant was a

registered company formed in 1916 with the name above. It sold margarine as a wholesaler in the London

area. The defendant contended that there was unlikely to be confusion between the goods sold by the two

concerns.

Decision: An injunction would be granted to restrain the defendants from the use of its name since the

claimant had the established connection under the Buttercup name. He planned to open shops in the south

of England and if the defendants sold margarine retail, there could be confusion between the two

businesses.

If, however, the two companies' businesses are different, confusion is unlikely to occur, and hence the

courts will refuse to grant an injunction: Dunlop Pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd 1907

The complaint will not succeed if the claimant lays claim to the exclusive use of a word which has a

general use: Aerators Ltd v Tollit 1902.

5.5 Appeal to the Company Names Adjudicators 6/09

A company which feels that another company's name which is too similar to its own may object to the

Company Names Adjudicator under the Companies Act. The Adjudicator will review the case and, within

90 days, make their decision and provide their reasons for it in public. In most cases the Adjudicator will

require the offending company to change its name to one which does not breach the rules. In some cases

the Adjudicator may determine the new name.

An appeal against the decision may be made in Court. The Court may reverse the Adjudicator's decision,

affirm it and may even determine a new name.

QUESTION Company name

Do It Yourself Ltd was incorporated on 1 September 20X7. On 1 October 20X7 the directors received a

letter from DIY Ltd stating that it was incorporated in 19X4, that its business was being adversely affected

by the use of the new company's name, and demanding that Do It Yourself Ltd change its name.

Advise Do It Yourself Ltd.

ANSWER

DIY Ltd may seek to bring a 'passing-off action'. This is a common law action which applies when one

company believes that another's conduct (which may be the use of a company name) is causing confusion

in the minds of the public over the goods which each company sells. DIY Ltd would apply to the court for

an injunction to prevent Do It Yourself Ltd from using its name.

However, in order to be successful, DIY Ltd will need to satisfy the court that confusion has arisen

because of Do It Yourself Ltd's use of its registered name and that it lays claim to something exclusive

and distinctive and not something in general use: Aerators Ltd v Tollit 1902.

Appeal to Company Names Adjudicator

Alternatively DIY Ltd might object to the Company Names Adjudicator that the name Do It Yourself Ltd is

too like its own name and is causing confusion, thus appealing to compel a change of name. In these

circumstances, the Adjudicator would hear the case and make a decision. If they compel a name change

Do It Yourself Ltd may appeal to the court.

5.6 Publication of the company's name

The company's name must appear legibly and conspicuously:

• Outside the registered office and all places of business.

• On all business letters, order forms, notices and official publications.

• On all receipts and invoices issued on the company's behalf.

• On all bills of exchange, letters of credit, promissory notes, cheques and orders for money or

goods purporting to be signed by, or on behalf, of the company

• On its website

5.7 Business names other than the corporate name

A business name is a name used by a company which is different from the company's corporate name or

by a firm which is different from the name(s) of the proprietor or the partners.

Most companies trade under their own registered names. However a company may prefer to use some

other name.

The rules require any person (company, partnership or sole trader) who carries on business under a

different name from his own:

(a) To state its name, registered number and registered address on all business letters (including

emails), invoices, receipts, written orders for goods or services and written demands for payment

of debts.

(b) To display its name and address in a prominent position in any business premises to which its

customers and suppliers have access.

(c) On request from any person with whom it does business to give notice of its name and address.

5.8 Registered office

Section 86 of the Companies Act 2006 provides that a company must at all times have a registered office

to which all communications and notices can be sent. Its location in England and Wales or just in Wales or

Scotland determines its domicile. A company may change its registered office (but not its domicile)

under section 87 by notifying the Registrar, but for a period of 14 days after notice is served any person

may validly present documents to the previous address.

CHAPTER ROUNDUP

• The memorandum is a simple document which states that the subscribers wish to form a company and

become members of it.

• A company's constitution comprises the Articles of Association and any resolutions and agreements it

makes which affect the constitution.

• The articles may be altered by a special resolution. The basic test is whether the alteration is for the

benefit of the company as a whole.

• A company's objects are its aims and purposes. If a company enters into a contract which is outside its

objects, that contract is said to be ultra vires. However the rights of third parties to the contract are

protected.

• Companies may only act in accordance with their objects. If the directors permit an act which is restricted

by the company's objects then the act is ultra vires.

• The articles constitute a contract between:

– Company and members

– Members and the company

– Members and members

• The articles do not constitute a contract between the company and third parties, or members in a

capacity other than as members (the Eley case).

• The constitution can be used to establish the terms of a contract existing elsewhere.

• Shareholders' agreements sometimes supplement a company's constitution.

• Except in certain circumstances a company's name must end with the words limited (Ltd), public limited

company (plc) or the Welsh equivalents.

• No company may use a name which is:

– The same as an existing company on the Registrar's index of company names

– A criminal offence, offensive or ‘sensitive'

– Suggest a connection with the government or local authority (unless approved)

QUICK QUIZ

1 Percy Limited has recently formed a contract with a third party which is restricted by the objects in the

company's constitution.

Which of the following statements is/are correct?

A The validity of the act cannot be questioned on the grounds of lack of capacity by reason of

anything in the company's constitution.

B The act may be restrained by the members of Percy Ltd.

C The act may be enforced by the third party.

D The directors have a duty to observe any limitation on their powers flowing from the company's

constitution.

2 If a company wishes to restrict its objects, what kind of resolution is required?

A Special resolution

B Special resolution with special notice

C Ordinary resolution with special notice

D Ordinary resolution

3 A company has been formed within the last six months. Another long-established company considers that

because of similarity between their names there may be confusion between it and the new company. The

only action the long-established company can take is to bring a passing-off action if it is to prevent the

new company using its name.

True

False

4 Which of the following persons are not bound to one another by the constitution?

A Members to company

B Company to members

C Members to members

D Company to third parties

5 How long does a company have to file amended articles with the Registrar if they have been altered?

A 14 days

B 15 days

C 21 days

D 28 days

ANSWERS TO QUICK QUIZ

1 A, C and D are correct. Members can only act before the contract is signed, so B is incorrect.

2 A. A special resolution is required to restrict the objects as with any alteration to the articles in general.

3 False. The long-established company can also complain to the Company Names Adjudicator.

4 A, B and C are correct: s 33. D is incorrect, illustrated by Eley v Positive Government Security Life

Assurance Co Ltd 1876.

5 B. A company has 15 days to file amended articles with the Registrar.