Why should I update my Articles of Association?

A couple of recent incidents brought to mind the old saying about insurance policies: ‘insurance doesn’t matter until it does’.

This week, I was asked by the director of a company, which had been incorporated before the new 2006 Companies Act, why his company should go to the trouble (or expense) of updating the articles of association. In his case, there were a number of reasons why that would be sensible, including the fact that the articles as they stood required the business to hold an annual general meeting (AGM) that served no worthwhile purpose.

Now, I guess he could well have taken the view that he should ignore the issue and just get on with day to day business. That is until, almost inevitably in the long life of a business, there was some disagreement or fall out that caused someone to seize upon the issue and use it to their advantage.

But this week also threw up another example of why it can be a dangerous (and expensive) to ignore potential pitfalls in company rules that are outdated or not fit for purpose. The High Court case of Williams –v- Russel Price Farm Services Limited [2020] delivered judgment in May 2020.

The case concerned a valuable company run and owned by Mr Russell Price who passed away on 08 March 2020. However, he had been organised (or so he thought) and had left a will, which passed ownership of the shares in his company to various friends and relatives. The problem that arose soon after his death, however, was that he was the sole director of the company. After his death, there was no living director and no-one to pass any board resolution to approve the transmission of his shareholding to any of the named beneficiaries. That meant that the beneficiaries could not become legal owners of the shares. And without becoming registered as the legal owners of the shares, they could not appoint any new director(s). A classic ‘catch 22’ situation.

With no director in post, the bank would not release any of the company’s funds or pay wages. The company still had contracts to fulfil and suppliers who were demanding to be paid. There was no time to wait for any lengthy legal proceedings to resolve matters if the company was to stay in business.

In the event, after an urgent application to the High Court, a judge was willing to exercise a discretion to override the normal company law procedures, but only after great expense and after demanding some onerous undertakings from the beneficiaries of Mr Price’s will.

And all of this simply because Mr Price had not updated the articles of association of his company. I guess what’s in your articles doesn’t matter until it matters.

For more information on the topic please contact Paul Lunt directly.