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The company’s constitution – some vital considerations

Chapter 6


The company’s constitution – some vital considerations


Chapter Contents


6.1      Introduction


6.2      The name of the company


6.3      Change of name


6.4      Business names


6.5      A company’s registered office


6.6      Changes of status


6.7      Objects of the company


6.8      Drafting the objects clause


6.9      Ultra vires contracts and common law


6.10    Section 9(1) of the European Communities Act 1972


6.11    The Prentice Report and the Companies Act 1989


6.12    A company’s capacity under the Companies Act 2006


6.13    Transactions involving directors or their associates – CA 2006


6.14    Directors’ power to bind the company – CA 2006


6.15    Charities


6.16    Capital


Summary


Self-test questions


Further reading



6.1  Introduction


The Companies Act 2006 makes a fundamental change to the company’s constitution.


Henceforth the company will effectively have a single constitution. The articles of association will become the company’s constitution. Formerly there were two components to the constitution; the memorandum of association (which covered matters like the company’s name and its objects) and the articles of association.


The memorandum of association is now defined in s 8 of the Act. It is a much shorter document and is in prescribed form, simply stating that the subscribers wish to form a company and agree to become members of that company and take at least one share each.


The memorandum of association must be delivered to the Registrar, together with an application for registration, stating the company’s proposed name, situate of the registered office, whether England and Wales, Wales, Scotland or Northern Ireland, whether the liability of the members of the company is to be limited and, if so, whether by shares or by guarantee, and whether the company is to be a private or public company (s 9 CA 2006).


If the company is to have a share capital there should also be submitted a statement of capital and initial shareholdings (s 10 CA 2006).


If the company is a company limited by guarantee there should be a statement of guarantee submitted (s 11 CA 2006).


Additionally, there should also be a statement of the company’s proposed officers (s 12 CA 2006) delivered together with the application for registration.


The application must also contain a statement of the intended address of the company’s registered office and a copy of any proposed articles of association (s 9(5) CA 2006).


A statement of compliance is also required to be delivered to the Registrar stating that the requirements of the Act as to registration have been complied with (s 13 CA 2006).


The articles of association now form the company’s constitution and those provisions of an existing company’s memorandum that do not come within the ambit of a new style memorandum (such as the objects of the company and the name of the company) will be treated as if they were provisions of the company’s articles (s 28 CA 2006).


It is intended in this chapter to set out some of the fundamental considerations that will influence a company in drawing up its constitution. These clearly include the name of the company, the company’s status (particularly whether it is public or private), and the company’s objects. In relation to the company’s objects a brief history of the development of objects clauses is set out to explain the context of the present law.


6.2  The name of the company


In general, those setting up a company are free to choose any name they wish. They are, however, constrained by certain rules.


6.2.1  Indications of type of company


A limited company must generally indicate this at the end of its name by the words ‘Public Limited Company’ or ‘plc’, or in the case of a Welsh company ‘cwmni cyhoeddus cyfyngedig’, or ‘ccc’, although this does not apply to community interest companies; see s 33(3) and (4) of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (s 58 Companies Act 2006). If the company is a community interest company which is public, then the appropriate company names will end with ‘Community Interest Public Limited Company’, or ‘Community Interest PLC’, or ‘Cwmni Buddiant Cymunedol Cyhoeddus Cyfyngedig’ or ‘Cwmni Buddiant CCC’ (see section 1.2.6).


Private limited company names should end with ‘Ltd’, or in the case of Welsh companies with ‘cyf’ (s 59 CA 2006). Certain companies are exempt from this requirement.


A private company is exempt from s 59 if:


(a)  it is a charity;


(b)  it is exempted from the requirement of that section by regulations made by the Secretary of State; or


(c)  it meets the conditions specified in s 61 (continuation of existing exemption for companies limited by shares), or s 62 (continuation of existing exemption for companies limited by guarantee).


Sections 61 and 62 provide for exemption if the company was previously exempt and did not include the word ‘Limited’ or any other permitted alternatives, and the objects of the company are the promotion of commerce, art, science, education, religion, charity or any profession, and anything incidental or conducive to any of those objects, and the company’s articles require its income to be applied in promoting its objectives, prohibit the payment of dividends or return of capital to its members and require all the assets otherwise available to the members to be transferred on its winding up, either to a similar body or to another body, the objects of which are the promotion of charity and anything incidental or conducive thereto.


6.2.2  Permitted characters


Section 57 of the Companies Act 2006 provides that the Secretary of State may make provision by regulation:


(a)  as to the letters or other characters, signs or symbols (including accents and other diacritical marks) and punctuation that may be used in the name of a company registered under the Act; and


(b)  specifying a standard style or format for the name of the company for the purposes of registration.


The regulations may prohibit the use of specified characters, signs or symbols, when appearing in a specified position (in particular at the beginning of a name).


6.2.3  Prohibited and restricted use of names


Section 53 of the Companies Act 2006 prohibits the use of certain names. A name must not, in the opinion of the Secretary of State, be offensive or such that its use by the company would constitute an offence.


In R v Registrar of Companies ex p Attorney General [1991] BCLC 476, Lindi St Clair, a famous prostitute, formed a company to carry out the service of prostitution. She initially attempted to call the company ‘Prostitutes Ltd’, ‘Hookers Ltd’ and ‘Lindi St Clair (French Lessons) Ltd’. All of these titles were rejected by the Registrar of Companies. Subsequently the company was registered as ‘Lindi St Clair (Personal Services) Ltd’ and this action was then brought to challenge the registration of the company since the company’s purposes were unlawful. In the upshot, the company was struck off the register.


The practice of creating ‘phoenix’ companies with similar names to companies that have gone into liquidation is outlawed by s 216 of the Insolvency Act 1986. Contravention of the section leads to civil and criminal sanctions (see also section 2.2.1).


6.2.4  Index of names


The name must not be the same as one already appearing on the index of names kept by the Registrar of Companies (s 66 CA 2006).


The Secretary of State may make provision by regulation supplementing the section. The regulations may make provision:


(a)  as to the matters that are to be disregarded; and


(b)  as to words, expressions, signs or symbols that are, or are not, to be regarded as the same, for the purposes of the section.


The regulations may provide:


(a)  that registration by a name that would otherwise be prohibited under this section is permitted:









(i) in specified circumstances; or
(ii) with specified consent; and

(b)  that if those circumstances obtain or that consent is given at the time a company is registered by a name, a subsequent change of circumstances or withdrawal of consent does not affect the registration.


Section 67 provides that the Secretary of State may direct a company to change its name if it has been registered in a name that is the same as, or, in the opinion of the Secretary of State, too like:


(a)  a name appearing at the time of the registration in the Registrar’s index of company names; or


(b)  a name that should have appeared in that index at that time.


Any such direction must be given within 12 months of the company’s registration by the name in question and must specify the period within which the company is to change its name. Failure to comply with the direction constitutes an offence by the company and every officer of the company in default (s 68 CA 2006).


6.2.5  Specific permission required


The approval of the Secretary of State is required for a company to be registered under the Act by a name that would be likely to give the impression that the company is connected with:


(a)  Her Majesty’s Government, any part of the Scottish Administration the Welsh Assembly Government or Her Majesty’s Government in Northern Ireland;


(b)  a local authority; or


(c)  any public authority specified for the purposes of this section by regulations made by the Secretary of State (s 54 CA 2006).


Other sensitive words or expressions are covered by s 55 CA 2006. The approval of the Secretary of State is required for a company to be registered under the Act by a name that includes a word or expression for the time being specified in regulations made by the Secretary of State.


The Secretary of State may, by regulations made under either s 54 or s 55, require that in connection with an application for approval of the Secretary of State, the applicant must seek the view of a specified government department or other body (s 56 CA 2006).


6.2.6  Tort of passing off and company names adjudicators


The choice of name may also be limited by the possibility of an action being brought against the company for the tort of passing off. If the name chosen by the company is similar or the same as the name used by an existing business, then the proprietor of that business may bring an action to injunct the company from using the name and may also seek an account of profits. Thus, in Ewing v Buttercup Margarine Co Ltd [1917] 2 Ch 1, the claimant, who operated as a sole trader under the name of The Buttercup Dairy Company, sought to restrain the defendants from using the name Buttercup Margarine Co Ltd. The action was successful. To succeed in an action for passing off, the claimant would have to show evidence of confusion and that he had suffered economic loss from this confusion. In Salon Services Hairdressing Supplies Ltd v Direct Salon Services Ltd (1988) SLT 414, there was no evidence of economic loss and therefore no injunction was applied.


In this case, the Scottish Court recalled interdicts on the basis that confusion and economic loss were unlikely to arise from a minor similarity between the names of the two companies. This was particularly the case since they traded in different areas and used different brand names for their products.


Provisions in the Companies Act 2006 allow for the first time for objections to a company’s registered name where there is similarity to a name in which a person has goodwill.


A person (the applicant) can object to a company’s registered name on the grounds:


(a)  that it is the same as a name associated with the applicant in which he has goodwill; or


(b)  that it is sufficiently similar to mislead by suggesting a connection between the company and the applicant (s 69).


The objection must be made by application to a company names adjudicator (see s 70). The respondents must then demonstrate if the ground specified in (a) or (b) above is established by the applicant that:


(a)  the name was registered before the commencement of the activities on which the applicant relies to show goodwill; or


(b)  that the company












(i) is operating under the name; or
(ii) is proposing to do so and has incurred substantial start-up costs in preparation; or
(iii) was formerly operating under the name and is now dormant; or

(c)  that the name was registered in the ordinary course of a company formation business and the company is available for sale to the applicant on the standard terms of that business; or


(d)  that the name was adopted in good faith; or


(e)  that the interests of the applicant are not adversely affected to any significant extent.


If none of these is shown, the objection shall be upheld.


The Secretary of State shall appoint persons to be company names adjudicators (s 70 CA 2006), and one of the adjudicators shall be appointed chief adjudicator (s 70(4) CA 2006).


The Secretary of State may make procedural rules in relation to proceedings before a company names adjudicator (s 71 CA 2006).


The adjudicator may make an order requiring the respondent company to change its name, and requiring all the respondents to take such steps as are within their power to facilitate the making of that change, and not to cause or permit any steps to be taken calculated to result in another company being registered with a name that is an offending name.


The order must specify a date by which the respondent company’s name is to be changed, and may be enforced as a court order (s 73 CA 2006).


An appeal lies from the adjudicator’s decision to the court (s 74 CA 2006).


6.3  Change of name


Section 77 of the Companies Act 2006 provides that a company may change its name by special resolution or by any other means provided for by the company’s articles. This is significant as the company’s articles may provide, for example, that the company’s name could be changed by a board resolution. Whether the change is by a special resolution, by a board resolution or by other means, the company must give notice to the Registrar (s 78).


A change of name may be made conditional upon the happening of an event, and on the happening of the event the company must then give notice to the Registrar (s 78(2) CA 2006).


When a new certificate of incorporation with the new name is issued, the change of name is effective (s 81).


In addition, the name of a company may be changed:


(a)  by resolution of the directors under s 64 (change of name to comply with a direction of the Secretary of State where a company ceases to be entitled to exemption from using the word ‘Limited’ or permitted alternative); or


(b)  by order under s 73 (the order of an adjudicator following objection to a company name) (see above section 6.2.6).


Mention has already been made of the Secretary of State’s power to require a company with a name that is similar to an existing name to change its name (s 67) (section 6.2.4). In addition, the Secretary of State has the power, within five years of the registration of a company, where it appears that misleading information has been given for the purposes of registration of a particular name, or that an undertaking or assurance has been given for that purpose and has not been fulfilled, to direct the company to change its name (s 75 CA 2006).


Furthermore, if, in the opinion of the Secretary of State, the name by which a company is registered gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public, the Secretary of State may direct the company to change its name. Such a direction must be complied with within a period of six weeks from the date of the direction, or such longer period as the Secretary of State may think fit to allow. There is no time limit in relation to exercise of this power (s 76 CA 2006).


In Re Association of Certified Public Accountants [1998] 1 WLR 164, Jacob J refused to set aside a direction issued by the Secretary of State for Trade and Industry who had directed the company to change its name. The Association of Certified Public Accountants had been set up to provide a professional association for accountants. Membership of the Association was chiefly drawn from people who did not have formal accountancy qualifications. The Secretary of State took the view that use of the word ‘certified’ indicated some type of formal qualification.


Jacob J agreed that the name was misleading and that since people would be likely to pay more to qualified accountants the name was likely to cause harm.


Companies may trade under names other than their corporate ones. Consent is still required, however, if a connection is suggested with HM Government or any local authority, as it is if the word is one of the sensitive ones set out in regulations.


6.4  Business names


Part 41 of the Companies Act 2006 deals with business names, i.e. names adopted by businesses and not just companies. This part of the Act is applicable additionally to any business carried on by a sole trader or by any business carried on as a partnership (see s 1192 CA 2006).


A person may not, without the approval of the Secretary of State, carry on business in the United Kingdom under a name that would be likely to give the impression that the business is connected with:


(a)  Her Majesty’s Government;


(b)  any part of the Scottish administration;


(c)  the Welsh Assembly Government;


(d)  Her Majesty’s Government in Northern Ireland;


(e)  any local authority or public authority specified in regulations made by the Secretary of State (s 1193 CA 2006).


Any person who contravenes the section commits an offence.


Furthermore, a person may not, without the approval of the Secretary of State, carry on a business in the United Kingdom under a name that includes a word or expression for the time being specified in regulations made by the Secretary of State (s 1194 CA 2006). Once again, a person who contravenes this section commits an offence.


Section 1195 of the Companies Act 2006 provides that the Secretary of State may, under s 1193 or s 1194, require that in connection with an application for approval to the Secretary of State, the applicant should seek the view of a specified Government department or other body. If such a requirement applies, the applicant must request the specified department or other body in writing to indicate whether it has any objections to the proposed name and, if so, why. He should submit to the Secretary of State a statement that such a request has been made and a copy of any response that is received.


The Secretary of State, after giving approval, may withdraw the approval under s 1193 or s 1194 if it appears to the Secretary of State that there are overriding considerations of public policy that require such approval to be withdrawn.


Section 1197 covers names that are misleading and considered inappropriate because they are associated with a particular type of company or form of organisation, or are similar to words, expressions or other indications associated with a particular type of company or form of organisation.


A person who uses a name in contravention of regulations under this section once again commits an offence.


Section 1198 provides that a person must not carry on business in the United Kingdom under a name that gives so misleading an indication of the nature of the activities of the business as will be likely to cause harm to the public. Once again contravention of the section involves the commission of an offence.


Section 1199 provides that in relation to ss 1192–1196 (sensitive words or expressions), and s 1197 (inappropriate indication of company, type or legal form), where a person carries on a business under an existing name immediately before the coming into force of this part of the Act and the use of the name is lawful, then it will remain lawful. Where a business is transferred to a person on or after the date on which this part of the Act comes into force, and the business is carried on under the same name, then the name for a period of 12 months continues to be lawful, and after that time the transition of lawfulness will end.


Chapter 2 of Part 41 of the Act deals with disclosure that is required in the case of individuals or partnerships. The Chapter applies to an individual or partnership carrying on business in the United Kingdom under a business name (s 1200 CA 2006). The information that is required to be disclosed in the case of an individual is his name, and in the case of a partnership is the name of each member of the partnership (s 1201 CA 2006).


Section 1202 provides that the information is required on:


(a)  all business letters;


(b)  written orders for goods or services to be supplied to the business;


(c)  invoices and receipts issued in the course of the business; and


(d)  written demands for payment of debts arising in the course of the business (s 1202 CA 2006).


Section 1203 allows for exemption for certain large partnerships if they have more than 20 persons if the following conditions are met:


(a)  that the partnership maintains at its principal place of business a list of the names of all the partners;


(b)  no partner’s name appears in the document except in the text or as a signatory;


(c)

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