A recent case has highlighted the importance of having modern, up to date articles of association. It may seem an unnecessary expense to ask professional advisers to review your articles. However, it can save cost and inconvenience in the long run, especially if the unexpected happens.
Articles that are not based on up to date Companies Act 2006 model articles for private companies can cause problems if a sole shareholder/director dies. In this case, the deceased’s shares passed by operation of law to his executors. The company’s articles did not permit the executors to appoint directors. Only shareholders could do this, but there were none. Probate was delayed by the need to value assets of the estate. In the absence of a director, no one could access the company’s bank account. The business was in danger of failing as a result.
After an urgent application to court, an order was granted to add the executors to the register of members so that a new director could be appointed. The onus was on the executors to provide undertakings not to renounce probate, to apply for probate as soon as possible and to pay all necessary taxes required for probate to be issued, which had to be met from their own accounts and not that of the estate.
A harsh lesson, and one which could have been avoided by having Companies Act 2006 model articles for private companies. These provide that, in any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right to appoint a director. That helpful provision is not in older forms of model articles, such as Table A 1985.
A more detailed note is available here giving examples of other areas in which your constitution may be out of date, and where adopting new articles may be advisable.
Kathryn Saunders
Lauren Melnyk