Articles of association are often read just once, if at all, by company directors before being put away in a safe to gather dust. However, as one Court of Appeal ruling showed, they are the constitutional bones of any company and are of crucial importance, particularly at times of crisis.
The case concerned a property company the shares in which were split 75 per cent to the son of its founder and 25 per cent to a dissolved Isle of Man company. The son became the company’s sole director following his father’s resignation. After the company hit financial difficulties, the son purported to appoint administrators.
In challenging the administrators’ appointment, two of the company’s creditors pointed to a provision in its articles of association which required that important decisions could only be made by a quorum of two directors. Their arguments, however, failed to persuade a judge that the appointments were invalid.
In upholding the creditors’ appeal, however, the Court found that the company had never become a single-member corporation because a quarter of its shares were held by the Isle of Man company. It made no difference that the latter had been dissolved.
The judge had also been wrong to hold that the creditors had acquiesced in the administrators’ appointment or that the articles of association had been informally varied by a consistent course of conduct on the part of the sole director and his father. In the circumstances, the Court declared that the administrators had not been validly appointed.