An Bunreacht na Cuideachta

Transcription

[2015]
1 An Bunreacht na Cuideachta I. INTRODUCTION For the purposes of discussing the development of the private companies constitutional documentation, this author proposes to examine the past, current and future position on the topic substantively and also begin to look at what currently the companies constitution comprises, not forgetting the impact on such documentation by the introduction of the new Companies Act 2014, hereafter CA 2014. It would be difficult when exploring the development, if one was restrained from briefly referring to the changes and approaches adopted in similar common law jurisdictions. In Leonard W. Hein’s article on the British Business Company1 he discusses that the act of 1844 in England provided for companies to produce a prospectus for registering, this could be described as the first step in forming what we now recognise as the modern day company constitution. Briefly this idea was abolished in 1847 as Robert Lowe the vice president of trade expressed his opinion on the matter: We should throw no obstacles in the way of incorporation, as it is to the interest of the public as much as for that of the company itself that it should take place. It is no privilege, but a right to be conceded… Having given them a pattern the State leaves them to manage their own affairs and has no desire to force on these little republics any particular constitution. However this idea was short lived and subsequently in 1867 the requirement of filing prospectus was introduced again with the English Companies Act 1867. II. MEMORANDUM Today, the companies constitution comprises of both, articles of association and the memorandum. These two essential documents form the fundamental governance of the company and notably where there is a discrepancy between the two, the memorandum takes priority. In Roper v Ward, Carroll J held that
“in construing the articles I am guided by the principles that 1
Leonard W. Hein ‘The University of Toronto Law Journal’ Vol. 15, No. 1 (1963) 134154 [2015]
2 they are subordinate to and controlled by the memorandum of association which is the dominant document.2”
Pursuant to s 5 of the CA 1963 every company must contain a memorandum. This is currently still the valid format in this jurisdiction since the introduction of the 1963 Companies Act, hereafter known as CA 1963. Most notably, common law jurisdictions generally operate in a similar fashion. Civil law countries such as France operate on a single document constitution often called a charter. The memoranda of a company is comprised of specific obligatory clauses which amount to five primary conditions. The name clause, as it suggests must include the companies registered name followed by the words limited or its Irish equivalent teorenta3, for companies which are registered as private limited. The company registrar has the power to refuse to incorporate a company where the name is undesirable.4 This includes situations that may arise where a company name is already registered. When considering a name, duplication is not the only factor to be considered. In fact the company registration office (CRO) have introduced a list of possible reasons a name may cease to be acceptable. This power to incorporate and manage company registration was transferred to the CRO by the minister for trade, enterprise and employment in 20015. The name of a company is the source of all information for creditors who wish to investigate a company they plan to do business with. It is for that very reason that a director who negates to use the correct name of the company whilst conducting business, may be held liable personally by means of disregarding separate legal personality6. The objects of a company can be described as that business, which the company plans to engage in. Creditors are deemed to have constructive notice of the objects clause of a company they engage with, and where a company attempts to bind itself in contract, that which is against the objects clause, such contracts may be deemed
ultra vires the company and subsequently
void ab 7
initio
. Only where it can be proven a creditor entered into a contract in good faith or was unaware8 of the companies lack of capacity to contract, may a contract be enforced that which was initially deemed
ultra vires
. 2

Roper v Ward [1981] 1 ILRM 408 (HC) The Companies Act 1963 (CA 1963) s 6(1)(a). 4
CA 1963 s 21. 5

The Company Law Enforcement Act (CLEA) 2001 s 86. as amended by CLEA 2001 s 21. 6
CA 1963 s 114(4). 7
The Companies Act 1963 (CA 1963) s 8. 8

European Communities (Companies) Regulations 1973, reg 6. 3
[2015]
3 The inherent unfairness associated with the doctrine of
ultra vires resulted in the draughting of extremely ambiguous objects clauses.
The objects of a company may be amended by special 9
resolution of the members where such a change is
bona fide and in the best interest of the company. Such a change may not have retroactive effect, that is to say after a company enters into a contract
ultra vires, at no later point may they alter their objects to allow the contract to 10
succeed. However it has been suggested since the English Jenkins report as discussed in Keanes11 book that the doctrine of
ultra vires is outdated and should be disregarded in favour of treating the company as a natural person with unlimited capacity to contract as opposed to a legal entity. Another clause dominant within the memorandum is the liability clause which provides that private companies may limit the liability of its members by limiting the amount liable to an amount unpaid on their shares in the case of a limited company12 or in the case of a company limited by guarantee to the amount of said guarantee. The total amount of the companies share capital will be accounted for in the companies authorised share capital clause and may be changed at a later stage, where the articles of association provide for such by means of an ordinary resolution.13 The association clause indicates the names and addresses of each subscriber of the memorandum and how many shares are allocated to each particular subscriber. Each member must subscribe to at least one share and the signatures must be attested by a witness. Curiously significant flaws were identified in the Jenkins report in 1943, however the CA 1963 was implemented in ignorance of such. It has been discussed in Courtney that perhaps the drafters of the CA 1963 although aware of inherent defects were cautious of adopting a different system for fear that England had not altered its law of companies. It must also be mentioned that had this jurisdiction adopted a new system of law governing companies which were radical in comparison to our neighbours, the courts would not have been able to rely on persuasive authority from England in unfamiliar circumstances. 9

CA 1963 s 10(1).
Northern Bank Finance Corp v Quinn [1979] ILRM 221 11

Ronan Keane,
Company Law
(4th edn, Clarus Tottel Publishing 2007). 12
CA 1963 s 6(2). 13
CA 1963 s 6(4)(a). 10
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4 III. ARTICLES OF ASSOCIATION The articles of association of a company act to regulate and govern the internal management of the company and provide clarity in relation to its powers, directors, remuneration and so forth. It is a public document and it is not required that a private limited company register such before incorporation14. Where a company is incorporated and no articles have been registered the default articles (Table A) governing private companies as per the first schedule to the principal act will be enforced15. Courtney16 suggests that in Ireland it is well known common practice for private companies to use the model articles with amendments rather than redrafting the entire document. Particular areas of importance when forming a company's articles include management of shares and members meetings. Altering the articles once they have been established can be achieved by means of special resolution, in which there must be a compliance of 75% in favour of change. Restrictions on the nature of alteration include situations where a change would conflict with the current law,17 or where the objective of such a resolution is to impose additional liability on existing members18. In
Allen v. Gold Reefs of West Africa Ltd19
an additional guideline was introduced, stipulating that all changes made must be
bona fide
and in the best interest of the company as a whole. This is a subjective test and does not interfere with the rights of the members obtained under s 27 of the CA 1963, which iterates that members will not be bound to alterations made to the memorandum and articles for to allow such would interfere with the members initial investment 14

The Companies Act (CA 1963) s 11
CA 1963 s 13(2). 16

Thomas Courtney,
The Law of Private Companies
(2nd edn, Tottel Publishing 2005). 17
Hennessy v Natural Agriculture and Development Association [1947] IR 159 18
Ding v Sylvania Waterway [1999] NSWSC 58
A person who joins a limited company is not liable, solely by virtue of the act of assenting to membership, to make a pecuniary contribution to its assets beyond the amount unpaid on the shares taken up or the amount of the member guarantee, as the case may be. 19
Allen v. Gold Reefs of West Africa Ltd [1900] 1 Ch 656 15
[2015]
5 decision in said company. Where a company purports to restrict the articles from being modified this restriction will be deemed void20. By virtue of s 25 of the CA 1963, all members of the company who where initial subscribers to the company memorandum and articles at the time of formation are deemed to be have entered into a statutory contract which binds the members with the company and with each other21. This is strictly a contract created for members and does not apply to members that are relying on the articles in a personal capacity but also happen to be members.22 Often behind the closed doors of companies shareholders agreements act to operate the management of the company although the disadvantage and the reason these agreements do not make the articles of association redundant is very clear. Where a new member subscribes to the company the advantage of allowing them to enroll upon set regulations becomes clear as opposed to drafting either a new agreement including the new subscriber or altering the existing agreement in such a way that the new member may become part of it. IV. COMPANIES ACT 2014 With the introduction of CA 2014 which has already been signed into law, awaiting a date of commencement, we must now examine what effect it will have on these two preceding documents which are quintessential to forming a company. Part 2 of the act deals with the registration and incorporation of companies. The new system will see the abolition of the memorandum and articles in favour of a consolidated, one document constitution for governing the company.
Having looked in depth at the past position of the companies act 19632013, we must now consider the radical changes and impacts this new act will have with relation to the companies constitutional documentation. Expected to be enacted in June of this year, currently the law in this area is until that time governed primarily by the 1963 act. There will be a transposition period of 18 months allowed 20

Cumbrian Newspapers Ltd [1987] Ch 1 Clark v Workman [1920] 1 IR 107 22

Eley v Positive Government Life Assurance Co [1875] 1 EXD 88
The statement is that Baylis was endeavouring to form a joint stock insurance company upon a new principle, and applied to the plaintiff to make advances to meet the expenses of getting up the company, and it was arranged between them that in the event of the company being formed the plaintiff should be appointed permanent solicitor to the company. That is to say, a bargain is made between a professional man and Baylis which, so far as the case is concerned, does not appear to have been communicated to those who were invited to join the company, that if the former will advance money for the formation of the company, he shall be appointed permanent solicitor, and the company shall be obliged to employ him as their professional adviser. When the articles are prepared, they are so by the plaintiff, and in them he inserts a clause which no doubt informs those who signed the articles of the arrangement, but does not appear to have been brought to the notice of those who joined from receiving circulars. 21
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6 for all companies to convert to one of the two new types of companies created, either a private company limited by shares which will require a special resolution or a designated activity company. Failure to convert a company will result in the automatic conversion of such company to one limited by shares (LTD), however it is important to note that in the meantime any company which has not completed a conversion will be deemed a designated activity company (DAC), for the simple reason that this type of company closely mirrors the old position of a limited company, furthermore it is additionally only required to pass an ordinary resolution to convert to such for the same “mirror” principle. The necessity for preservation of share capital as required currently will be removed and instead a company will just have to remain solvent. The DAC will retain the old model of constitution which contains a memorandum and articles of association. Companies limited by guarantee will be construed as a DAC as per part 16 of the act. This is not the same for the new LTD company which implements a single document constitution which includes the companies name and type, which is a private company limited by shares. Of course the share capital will also be stated here along with how many shares have been allocated. Finally any additional regulations of the company, if any. Much of the regulations that were contained in the predeceasing limited companies articles have been enshrined in various sections of the act already. Another benefit of the new LTD company is the abolition of the objects clause which constrained certain contracts from being enforced against companies by uneased creditors who were previously thought to have constructive notice. This new type of limited company will have full capacity to contract as though it were in fact a natural person. With the abolition of the articles of association, the previous position as contained in s 25 of the soon to be redundant CA 1963 whereby the members are deemed to be bound by the company and bound by each other is dissolved and instead members who subscribe to a company's constitution are bound by the provisions set out in the sections of the new act in addition to the regulations that have been created on formation of the company. This shall not affect the previous position on shareholders agreements which by their very nature are purposely secretive, they shall as always be bound to the rules of contract law. The current (Table A) default articles of association will be removed and instead provisions for company management will be included in the legislation and any provision, a company wishes to remove may be done so in their constitution. [2015]
7 V. CONCLUSION
Since 1993 New Zealand has adopted the approach of a single document constitution which incorporates the articles of association and memorandum in a single document however it does not make it obligatory to adopt a constitution.23 Similarly South Africa has since 2008 followed suit by introducing a merged format document called a memorandum of incorporation24. This permutation introduced into both common law jurisdictions thus far promotes simplicity of company formation, an approach in which other common law jurisdictions have been eager to incorporate into their domestic law. In summary, the act has in fact simplified a great deal of the law on private companies, specifically in relation to incorporation and capacity. The previous position where a company failed to return the articles of association and by default were subject to the default articles provided for in s 11 of the principal act is abolished with the introduction of this new constitution, therefore simplifying the process for both the registrar and the company directors. Regulations relating to management of the company that are not included in the document have no effect, and so must be added by means of altering the company constitution by way of special resolution. This eliminates companies being operated by internal rules of articles that which have no effect owing to noncompliance of registration. In reality the CA 2014 will govern companies primarily unless they wish to alter a provision, provided such an alteration is lawful, making it even easier for a private company to be formed. Furthermore, the issue of the objects clause, which has burdened the court system and also promoted unlawful behaviour from company directors who knowingly entered into contracts with knowledge they had no capacity to do so, has been rectified with the abolition of the objects 23
The Companies Act 1993 s 26 (NZ)
The Companies Act 71 of 2008 s 15 (SA) 24
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8 clause. That is not to say that companies do not often enter into contracts which would normally be outside the remit of their normal business conduct,
bona fide. In fact, it is more a testament to a growing society and our economic situation that companies would enter into various lines of business that may seem to be the opposite of their sole enterprise, but ultimately it may be in the best interest of the company at the time. One only has to be familiar with the case of Bell Houses
25
to envisage a modern day scenario. Bibliography Books 1.
2.
3.
4.
Keane R,
Company Law
(4th edn, Clarus Tottel Publishing 2007). Courtney T,
The Law of Private Companies
(2nd edn, Tottel Publishing 2005). Hannigan B,
Company Law
(2nd edn, Oxford University Press 2009). Callanan G,
Irish Company Law
(3rd edn, Gill and Macmillan 2007). Cases 1.
2.
3.
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5.
6.
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8.
9.
Allen v. Gold Reefs of West Africa Ltd [1900] 1 Ch 656 Bell Houses Ltd v City Wall Properties Ltd [1966] 1 QB 207 Clark v Workman [1920] 1 IR 107 Cumbrian Newspapers Ltd [1987] Ch 1 Ding v Sylvania Waterway [1999] NSWSC 58 Eley v Positive Government Life Assurance Co [1875] 1 EXD 88 Hennessy v Natural Agriculture and Development Association [1947] IR 159 Northern Bank Finance Corp v Quinn [1979] ILRM 221 Roper v Ward [1981] 1 ILRM 408 (HC) Legislation 1. The Companies Act 1963 2. The Companies Act 1993 (NZ) 3. The Companies Act 71 of 2008 (SA) 25

Bell Houses Ltd v City Wall Properties
[1966] 1 QB 207 [2015]
9 4. The Companies Act 2014 5. The Companie Law Enforcement Act 2001 6. European Communities (Companies) Regulations 1973, reg 6. Articles 1. David Milman ‘
Int
erpreting corporate constitutions: re
cent judicial illumination
’
(2003) 20 L.N 14 2. Anthony O. Nwafor ‘
The unending debate on the contractual effect of the company's constitution a comparative perspective’ (2013) 24(7)
I.C.C.L.R. 261272 3. Saleem Sheikh ‘Company Law Reform: 2’ (2006) 17(3) I.C.C.L.R. 96101 4. Clare M.S. McGlynn ‘
The constitution of the company: mandatory statutory provisions v private agreements’ (1994)
15(10)

Comp. Law. 301307 5. Rehana Cassim and Femida Cassim ‘The Reform of Corporate Law in South Africa’ 16(10) (2005) 411418 6. Leonard W. Hein ‘The University of Toronto Law Journal’ Vol. 15, No. 1 (1963) 134154