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Jordans FAQs: Why would I adopt more 'practical' articles?

11th Feb 2014
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Q:           I’m updating my company’s articles and it’s been suggested that I adopt a more practical set of Articles.  The Model Articles were designed to be simple, why would I want to adopt a different version?  

A:            The Companies Act 2006 model articles constitute the default provisions for private companies limited by shares, public limited companies and companies limited by guarantee incorporated on or after 1 October 2009. 

The model articles contain only 53 separate articles, compared to the 118 of Table A (www.practicallaw.com/6-107-7359) (the default regulations for companies limited by shares under the Companies Act 1985). In order to produce articles that are this succinct and suitable as a default for all companies, the model articles do not necessarily make clear all of the powers, rights and obligations that directors and members must be aware of (or could take advantage of). 

For example, the Model Articles provide that where a director has an interest in the matters being put to a vote, he cannot be counted in the quorum and he cannot vote unless shareholder approval is obtained.  It is important to note that a director will be conflicted not only if he is directly interested in a matter but also if his parents, spouse or children (Family) are interested in the matter or the matter concerns a company which he is associated with. 

The directors may wish to make proposals in relation to their remuneration. Under the Model Articles, they will all be conflicted and unable to participate.  If the directors or their Family are shareholders (which is often the case) and the share capital is being altered in any way, again the directors will be conflicted.  If the company rents property from a director or his Family, under the Model Articles, any decision regarding that property cannot be taken by him.  The result is that companies frequently find that all directors are conflicted.  The members of the company are able to approve conflicted directors taking decisions but this process will increase the time and cost of almost every decision. 

Adopting Articles which provide that a conflicted director may vote on any matter, provided that he declares his interest in line with Section 177 of the 2006 Act will alleviate these difficulties.  Adopting a set of user friendly Articles of Association that suits your business from the outset and give you flexibility to run your company your way, should prove to be cost effective in the long run. . 

About the author: Dana Ewans LLB, ACILEx, Jordans Corporate Law Limited

For more information, visit Jordan's official website.

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