The nature and effect of the Articles of Association have finally
reached the point where they reflect the contractarian perception of
the company. Discuss.
An interpretation of the question would lead one to understand that a
discussion on whether or not the nature and effect of the Articles of Association (AA) of a company have reached a point whereby they accurately reflect the contractarian perception of a company. Arguments will be given in support and in contrast of this statement, before a conclusion is formed. Generally, the AA are defined as the by-laws or rules and regulations that govern the management of the companys internal affairs and the conduct of its business. According to s18(1) Companies Act 2006, all companies are required to have them, and they are either custom-made for the company or they are to apply the model articles by default under the Companies (Model Articles) Regulations 2008. However, any gaps in custom-made articles are filled by the model articles unless stated otherwise. The contractarian perception essentially sees the company as a 'nexus' of contracts between those various parties who are involved in a company's affairs, which asserts that corporations are nothing more than a collection of contracts between different parties - primarily shareholders, directors, employees, suppliers, and customers. It can be said that the AA does reflect the contractarian perception of the company. One of the main ideologies of the contractarian perception is that the ultimate relationship between the company and others (be it another company or members of the company) is based on the simple theory of a contract, and one of the important elements of a contract is that the parties to it have the freedom to contract. Freedom to contract is defined as the freedom of private or public individuals and groups (of any legal entity) to form contracts without interventions or restrictions from the State. Through this, individuals possess a general freedom to choose with whom to contract, whether to contract or not, and on which terms to contract. As such, by allowing companies to draft their own AA, this enables them to create a contract with their own terms, as well as terms that specifically suit their form of business rather than a general set which may not be able to fit accurately with their form of dealings. It also enables companies, as well as those who contract with them, to impose freedoms and limitations into their contracts as deemed fit, based on whatever is stated in their respective AA. Moreover, it also provides the company room to include how much or how little flexibility they would allow when contracting with other parties. All in all, the allowance for companies to draft and legislate their own AA permits one of the very crucial elements to the contractarian perception to be realised. Secondly, the AA of a company is a public document, meaning it can be accessed by anybody, regardless of whether they are associated with the company or otherwise. An important element of the contractarian theory is that contracts and those relying on contracts should not have any level of uncertainty, as uncertainty can lead to confusions and dissatisfaction to the parties of a contract. It can be said that the AA of the company eliminates this element of uncertainty as those who wish to contract with the company, or even those who are already in contract with the company, can access this document beforehand (or anytime) to clearly identify the position, contents and essence of management and business of the company. This creates certainty for those who intend on contracting with the company, and they can be clear as to what extent the company runs its powers and business. Additionally, another important basis of the contractarian principle is that the relationship of the company and all other parties that deal with it is based on a contract. As such, the AA can be said to be the basis of their contract, as it states all the powers and limitations of the company and its members. This is important and relevant as if one of the parties acts in contrast of what the AA permits, then this would be a breach, and since the AA is part of the basic contract, they would be in breach of it. Under the contractarian approach, when there is a breach of contract, appropriate remedies under common law shall follow. Hence, the AA does reflect the contractarian approach, and if it is breached then damages can be claimed. However, it must be noted that not all elements of the AA under the Companies Act 2006 accurately reflect the contractarian perception. Firstly, unless the company explicitly states that its AA is definite and conclusive, any gaps in their own drafted AA will be filled by the Model Articles as set up under the Companies (Model Articles) Regulations 2008. The issue with this is that it may limit the freedom the parties within the contract are entitled to in terms of freedom of contract. There may be instances whereby the company does intend on not governing a certain matter and hence dont address it in their AA, but the Companies (Model Articles) Regulations Act 2008 assumes this as a mistake on their part and they go ahead to fill in the void. This may come across as a limitation to the parties freedom to contract in the sense of the terms to their respective contracts. Secondly, The Companies Act 2006 was fully implemented on 1st October 2009 and it provided a new form of AA and Model Articles for companies incorporated in the United Kingdom. Under the new legislation, the AA became the single constitutional document for a company, and subsumed the majority of the role previously filled by the separate memorandum of association. A company registered before the above date will have both memorandum and articles drafted under the old law until such time as it decides to adopt new articles. If it does decide to adopt the new Articles, it must pass a special resolution, and unless it does so, will still be governed under the old law. Since the companies incorporated before the passing of the new Companies Act 2006 have the option of whether or not to adopt the new Articles, this may create an issue of uncertainty as individuals or other companies intending on contracting with them will be unsure of which law is governing them. It may also create legal complications, as the contents and scope of the old and new articles do differ. Hence, the allowance towards companies incorporated prior to this latest legislation does contravene with the contractarian principle of certainty. Conclusively, although the AA which was introduced in the Companies Act 2006 does move towards attempting to cover some of the aims and objectives of the contractarian theory such as by introducing more certainty and comprehensiveness as well as championing parties rights to freedom of contract, there are still various loopholes that exist and should be addressed if the aim is to completely reflect the nature of the contractarian approach to its maximum potential and ability without jeopardising other aspects of the company.
“Section 172 of the Companies Act 2006 is nothing more than statutory ‘window dressing’. It adds nothing at all of substance to the director’s traditional fiduciary duty of loyalty. It is also confusing and creates unnecessary uncertainty for directors with regard to their legal liability risk.”
A Simple Guide for Drafting of Conveyances in India : Forms of Conveyances and Instruments executed in the Indian sub-continent along with Notes and Tips
Guide: SOC 2 Reporting on an Examination of Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy