By way of background, the 1985 Act (and previous company legislation) required a company to have a list of objects in its memorandum of association. These set out the company’s entire purpose and the scope of its activities. The problem was that, although objects clauses were drafted widely, there was still room for debate as to what a company could or could not do.
A deregulatory measure in the 2006 Act set out to resolve this difficulty. This provided that, unless a company's articles specifically restrict its objects, its objects are unrestricted (section 31). This cleared up the problem for new companies incorporated under the 2006 Act (i.e., in October 2009 or later), but uncertainty remained for companies previously incorporated under the 1985 Act. How to interpret their objects set out in the old-style memorandum of association? Section 28 of the 2006 Act makes it clear that these and the other provisions of a 1985 Act memorandum of association should now be read as part of the company’s articles of association (so remain part of its constitution), but is silent about how to interpret old-style objects.

Scenario

Consider the following scenario illustrating the pitfalls for 1985 Act incorporated companies.

• Pitfall Limited is a 1985 Act incorporated company. It previously had a memorandum of association with objects which did not expressly allow the company to borrow or grant security (although these did not expressly prohibit the company from doing so either).
• In 2015, Pitfall Limited's company secretary filed a special resolution adopting new articles of association (which did not contain a statement of objects) and Companies House Form CC04. (Form CC04 is the form required to notify Companies House about a change to the company's objects.) The special resolution stated only that "the attached articles of association be approved and adopted as the new articles of association of the Company in substitution for and to the entire exclusion of the existing articles of association". As can be seen, the special resolution did not expressly remove the objects clause or amend the old memorandum of association.
• It is now 2017 and Pitfall Limited needs to borrow from its incoming lender, Bank plc, and grant security to it as part of the loan package.
• Bank plc and Pitfall Limited are close to agreeing a final facility agreement. Pitfall Limited’s board have approved the deal and are close to signing after many late-night conference calls. At the last minute, Bank plc notices as part of its due diligence that Pitfall Limited was incorporated under the 1985 Act without an express power to borrow and grant security. It therefore requests that Pitfall Limited pass a new special resolution to remove the objects, which would delay the transaction significantly.

What could Pitfall Limited argue in this scenario to avoid obtaining a new special resolution to remove the objects?

• It might try to argue that Pitfall Limited does not require a special resolution to expressly remove the objects, on the basis that unless its articles specifically restrict its objects, its objects are unrestricted – and the newly adopted articles do not specifically restrict Pitfall Limited from borrowing or granting security. However, this argument depends on a fairly narrow interpretation of section 31 as applied to old objects clauses, which may not be accepted by the bank (or a court, for that matter).
• A safer argument may be that, given that the provisions of the old memorandum are automatically deemed to form part of the old articles under section 28 of the 2006 Act, replacement of the old articles by the new articles effectively deleted both the old articles and the provisions of the old memorandum. Therefore the wording of the 2015 special resolution alone should have been sufficient to remove the restriction, despite the fact it did not expressly remove the objects or amend the memorandum of association. It is essential, however, that the company files Form CC04 at Companies House as until this is done the removal of its objects is not effective (section 31(2)(c)).
• Bank plc will in any case be protected by section 39. This provides that, in effect, just because a transaction is outside the scope of what is permitted by the company’s constitution, this will not make it void. However, the directors of Pitfall Limited will be in breach of their duty to comply with the constitution (although such breach may be ratified by the unconnected shareholders).

Take-aways

• When adopting new articles of association for a company incorporated before October 2009, it is important to check whether the company has specifically removed its objects by special resolution. Alternatively (or in addition), it may have adopted an entirely new set of articles in substitution for all existing and previous articles (including the provisions of the memorandum deemed to be incorporated into the articles). Either way, Form CC04 must be filed at Companies House to complete the process.
• Where it is not clear that the objects have been deleted, and they are insufficiently wide to cover the proposed transaction, the safest course is to pass a specific special resolution removing or amending the objects (if for any reason the company wishes to retain them), and file Form CC04.
• Companies limited by a guarantee registered for charitable purposes are treated differently under the 2006 Act, and must have restricted charitable objects. A charity should seek legal advice before amending its objects.

Client Alert 2017-122