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The importance of clear articles of association

The recent case of The Sherlock Holmes International Society Ltd v Aidiniantz [2016] highlights the importance of ensuring that your company’s…

The recent case of The Sherlock Holmes International Society Ltd v Aidiniantz [2016] highlights the importance of ensuring that your company’s articles of association are clearly drafted.

The facts

The Sherlock Holmes International Society Ltd (the “Company”) was involved in the running of the Sherlock Holmes Museum in Baker Street. The case centres on a family feud between Mr Aidiniantz and his half-siblings, Stephen, Linda and Jennifer.

The Company’s only members since incorporation were Mr Aidiniantz and his mother, Grace. Grace had initially been the sole director but she subsequently appointed Jennifer. Grace resigned as a director in 2013 and Jennifer appointed Stephen before resigning herself, leaving Stephen as the sole director from 2013 onwards.

The death of Grace in 2015 left Mr Aidiniantz as the sole member. This is important, as will become apparent.

For the purposes of this article, the key provisions of the Company’s articles of association stipulated that: 

  1. Only persons who are members of the Company shall in any circumstances be eligible to hold office as a director and any appointments must be made by the Board.
  2. Any director appointed by the Board shall remain in office until the next AGM, at which point he will be eligible to stand for re-election.

  3. There must be at least one director and, unless otherwise determined by the Board, the quorum for board meetings would be two.

The articles did not provide for the quorum for board meetings to be amended where there was only one director, nor did they give a sole director authority to act on behalf of the Company.

Mr Aidinantz petitioned to wind up the company on grounds of insolvency in late 2014, and in March 2015 a winding up order was granted. In June 2015, the Company (acting on the authority of Stephen as sole director) appealed the order. Mr Aidiniantz presented the following three arguments in his application to set aside the Company’s appeal:

  1. Stephen was not a member so, under the Company’s articles, he was incapable of becoming a director;
  2. Stephen’s appointment was invalid. He was appointed by a sole director and, therefore, the board had been inquorate; and
  3. In any event, Stephen’s appointment as director had terminated on 31 December 2014. This was the last possible date for that year’s AGM and Stephen had failed to stand for re-election.

The judgment

Mr Aidiniantz’s application was successful, but only on the strength of his third argument, above. The first two arguments failed because: 

  1. The Judge found that the articles had been amended to allow Stephen to be appointed as a director, despite not being a member. Although s.21 (1) of the Companies Act provides that “A company may only amend its articles by special resolution”, the Judge invoked the ‘unanimous consent’ principle as applied in Cane v Jones [1980]. This set out that where all members of a company consent to a matter which a general meeting could carry into effect, that consent is binding as though the members had passed a resolution in a general meeting. This consent can be given expressly or impliedly and acquiescence can be equal to consent.

    From the conduct of Mr Aidiniantz (and Grace), in consenting to the appointment of various non-members as directors on three previous occasions, it could be inferred they had intended to amend the articles so that non-members were eligible to be appointed as directors.

  2. As the Company’s articles permitted there to be just one director, the Judge rejected Mr Aidiniantz’s argument that the board had been inquorate when it appointed Stephen as a director. Where there was a sole director, common sense dictates that each time he made a decision he would be implicitly determining that the quorum for the purpose of making that decision would only be one. Therefore, Stephen’s appointment was valid.

However, in relation to the third argument, the Court held that Stephen should have realised in late 2014, when he first raised the Company’s opposition to the winding-up order, that his directorship was due to lapse and acted upon this. As he had failed to stand for re-election, Stephen had ceased to be a director following 31 December 2014. This meant he had lacked the authority to act on behalf of the Company in June 2015 in bringing the appeal against the winding-up order.

Comment

This case provides guidance on how amendments to articles of association can be made and also the merits of drafting clear and specific articles of association. This is particularly important in relation to inter-relating clauses such as those stipulating the quorum for meetings and the minimum number of required directors (as was the case here).

Some key points to take away from this case are:

  • Special resolutions are not always required to amend a company’s articles of association. The unanimous conduct of a company’s members has the potential to inadvertently amend a company’s articles of association where it can be inferred, on the balance of probabilities, that this was their intention.
     
  • The benefit that clear and precise drafting of a company’s articles of association can bring in ensuring all potential eventualities are addressed where possible.
     
  • Directors must ensure they are aware of any provisions dictating that they are subject to re-election and ensure they act upon them.

If you are interested in finding out more about this case, or would like assistance with the drafting/interpretation of your company’s articles of association, please contact Victoria Robertson, associate in the corporate department, on 0113 213 4107 or email victoria.robertson@weightmans.com.