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Company Law

Analysis - guidance - compliance

30 AUG 2016

Articles of association: alteration and interpretation

Articles of association: alteration and interpretation
Sherlock Holmes may have entered the public consciousness well before the seminal company law decision in Salomon v A Salomon and Company, Ltd (1897), but company law was already a well-established area of the law when the first work to feature the great detective was published in 1887, and his career spanned an important period in the development of the field. For all that, it has to be said that Sir Arthur Conan Doyle’s creation probably did not devote much of his time to considering the nature of companies, their internal organisation or their effect on society.

However, a recent case concerning a company connected with the Sherlock Holmes Museum in London’s Baker Street raised several interesting company law issues. The most interesting feature of the decision in The Sherlock Holmes International Society Ltd v Aidiniantz [2016] EWHC 1076 (Ch) was the deputy judge’s generous interpretation of the unanimous consent rule in relation to the alteration of a company’s articles, but his judgment also touched on the effect of provisions in articles dealing with the quorum for board meetings and with the automatic retirement of directors appointed by the board.

The Sherlock Holmes International Society Ltd v Aidiniantz (2016) – the facts

The relevant facts of the case were, in outline, as follows:

  • the background to the proceedings was a family feud in which a Mr Aidiniantz was pitted against his three half-siblings;
  • The Sherlock Holmes International Society Ltd was involved, together with several other companies, in the operation of the Sherlock Holmes Museum in Baker Street;
  • the company, a company limited by guarantee which was formed in 2004, had two members, namely Mr Aidiniantz and his mother, Grace, until the latter’s death in 2015;
  • Mr Aidiniantz’s three half-siblings, amongst them a Mr Riley, served as directors of the company at various times, but at the time of the proceedings the register at Companies House showed that Mr Riley was the company’s sole director;
  • Mr Riley had been appointed by the company’s board in 2014, at a time when the board consisted of a single director;
  • the company’s articles provided that:
    • only members were eligible to serve as directors;
    • the company was permitted to have just one director;
    • the quorum for board meetings was two, unless the directors determined otherwise;
    • the company was required to hold an annual general meeting every year; and
    • any director who was appointed by the board would remain in office only until the next AGM,
  • the family feud began in 2012, and gave rise to various legal proceedings;
  • in July 2014, Mr Aidiniantz presented a winding-up petition in respect of the company, and a winding-up order was duly made in March 2015;
  • the company was granted permission to appeal the winding-up order in June 2015; and
  • in October 2015, Mr Aidiniantz issued an application for a declaration that the company had not authorised the appeal.

The case before the High Court concerned Mr Aidiniantz’s application for a declaration that the company had not authorised the appeal. His application was based on three grounds:

  • although Mr Riley was recorded at Companies House as being the company’s director, he was not a member of the company, and so, pursuant to the articles, was not qualified to hold that office;
  • Mr Riley had purportedly been appointed by a board which, consisting of just one director at the time, was inquorate under the articles; and
  • even if he was qualified to act as a director and had been properly appointed, Mr Riley had ceased to be a director pursuant to provision in the articles dealing with the automatic retirement of directors who had been appointed by the board – he had been appointed in 2014, and although no AGM had been held in that year, he had ceased to be a director on the last possible date on which that year’s AGM could have been held, namely 31 December 2014.

The Sherlock Holmes International Society Ltd v Aidiniantz (2016) – the decision

The first issue to which the deputy judge turned his mind was whether Mr Riley was disqualified from being a director because he was not a member of the company. On the face of it, there appeared to be little doubt that he was disqualified, for the articles provided that only a member could be appointed as a director, and that requirement had not been removed by means of a special resolution altering the articles pursuant to section 21 of the Companies Act 2006. The company, however, suggested that the articles had been amended informally by means of the unanimous consent rule (ie the Duomatic principle), under which unanimous decisions of members may be effective even if they are not taken in accordance with a formal decision-making procedure. Although the members, namely Mr Aidiniantz and his mother, did not appear to have entered into any express agreement to alter the articles, the company argued that the rule had been engaged by the fact that they had in the past appointed Mr Aidiniantz’s half-siblings, none of whom were members of the company, to the board. Its submission, in short, was that the members had informally altered the articles so as to permit anyone to be appointed as a director.

The deputy judge asked himself whether the members’ conduct evinced an intention to alter the articles. It may have seemed that the more obvious conclusion to draw from the fact that they had made the appointments was that they had intended to waive the qualification requirement in the articles on those occasions. The deputy judge stated, however, that as a matter of law members are not competent simply to waive such a requirement, and felt that Mr Aidiniantz and his mother had instead intended to amend the articles. In relation to Mr Aidiniantz, he commented as follows:

'I therefore think a more credible objective explanation of his conduct to be that he intended to do whatever was required to allow the Riley siblings [ie his half-siblings] to be validly appointed, rather than that he made an error of law and made a series of invalid appointments. Since it was in fact necessary to amend the articles, I think his conduct is explicable only as evincing an intention to do so.'

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Although the judgment is not entirely clear on the point, the deputy judge appears to have concluded that the amendment took the form not of the complete removal of the membership qualification, but rather the removal of it specifically in relation to Mr Aidiniantz’s half-siblings.

The submission that, in any case, Mr Riley had purportedly been appointed by a board which was inquorate was founded on the provision of the company’s articles which specified that the quorum for board meetings was two, unless the directors determined otherwise. The deputy judge dealt with this point briefly. Having noted that the articles also specified that the company was permitted to have just one director, he rejected the submission on two grounds. First, he felt that the provision did not actually require a sole director to make a determination that the quorum was one. Secondly, he was prepared to take the view that every time a sole director made a decision he would implicitly be determining that the quorum for the purpose of making that decision was one.

The final issue was whether Mr Riley had ceased to be a director under the automatic retirement provision in the company’s articles. Mr Riley had been appointed in 2014, and although the company had not held an AGM in that year, Mr Aidiniantz’s case was that the effect of the provision was that he had ceased to hold office on 31 December 2014, which was the last date on which the AGM could have been held. In the event, the deputy judge did not have to address this point, because the company accepted that this analysis of the effect of the provision was sound in law.

In summary, then, the position was that the company’s articles had been amended such that Mr Riley was qualified to act as a director, that he had been appointed by a quorate board, but that he had ceased to hold office at the end of 2014. It followed, therefore, that the company’s appeal against the winding-up order of March 2015 was unauthorised and could not proceed.


Legal practitioners, directors and company secretaries are faced with the difficult task of keeping up to date with the considerable flow of cases on company law matters. Cases like the present one show the value of making the effort at least to keep an eye on the development of judge-made law in this area. The High Court’s decision is not especially ground-breaking, but it nevertheless provides anyone who needs to understand the legal workings of companies with a good deal of food for thought.

The point concerning the effect of an automatic retirement provision is well established (see Re Consolidated Nickel Mines, Ltd [1914] 1 Ch 883 at 888 – 889), but it is not one which arises every day, so the reference to it in the case serves as a useful reminder of the law for anyone who is responsible for understanding the meaning of a company’s articles.

As regards the interpretation of the quorum provision, the lesson to be drawn from the case is that care should be taken to ensure that articles are as clear and comprehensive as possible. As it happens, the deputy judge took a pragmatic view of the provision, giving it a common-sense interpretation. Ideally, however, the issue would never have arisen; it would have been perfectly easy to include in the articles a proviso to the effect that the quorum would fall to one in the event that the company had just one director.

Without a doubt the most interesting feature of the decision was the deputy judge’s generous application of the unanimous consent rule. Certainly, the rule has a wide scope, and the policy which underpins it is that the smooth operation of smaller companies requires that their members are not held strictly to all the formal decision-making requirements which would normally apply. On the other hand, the courts have shown over the years that it does not give members who act unanimously a licence to act without any constraints whatsoever. In the present case, the deputy judge appreciated that the rule was not of unlimited scope, and took the view, no doubt correctly, that the question for his consideration was 'whether the members’ words and conduct give rise on objective analysis to the conclusion that they intended to amend the articles'. His application of that test to the facts, though, is perhaps not beyond criticism. It seems clear that Mr Aidiniantz and his mother were content for the former’s half-siblings to serve on the board despite the fact that they were not members, but it is less clear that they could truly be said to have consented to the amendment of the articles to remove the shareholding qualification. There was no suggestion that they had considered amending the articles, let alone that they had decided to proceed with an amendment. The deputy judge’s reasoning appears to be based on the view that they intended to do all that was necessary to allow the individuals concerned to act as directors, but there is surely a conceptual difference between having a general intention to achieve a goal and having a specific intention to undertake the individual steps involved in achieving that goal. Despite the deputy judge’s decision to the contrary, it is difficult to escape the conclusion on these particular facts that the members intended to do nothing more than waive the shareholding qualification on an ad hoc basis (albeit that any such waiver would be legally ineffective).

Notwithstanding this criticism, the deputy judge’s application of the unanimous consent rule is not without support in the case law. In Cane v Jones [1980] 1 WLR 1451, a provision in a company’s articles which gave the chairman a casting vote was held to have been altered by a shareholders’ agreement which did not expressly state that it was purporting to alter the articles, but did provide that the chairman was not to have a casting vote. More pertinently, in Re Home Treat Ltd [1991] BCC 165, a company had been operating outside the objects clause set out in its registered memorandum, but the evidence suggested that the shareholders believed that it had different objects, suited to its activities, and the court held that they had consented to an informal alteration of the clause.

The implication of these decisions, taken together with the decision in the present case, seems to be that the traditional scope of the unanimous consent rule has in practice been widened, such that it may be used even where the members have not specifically turned their minds to the particular act under consideration (in these instances, an alteration of the company’s constitution). Whether this is a welcome development is a matter of opinion. There is certainly something to be said for interpreting the rule generously; after all, it is designed to ensure that smaller companies are not penalised for a failure to adhere strictly to all the formalities laid down by the company law regime, and that is surely a sensible aim. On the other hand, informal decisions are often by their nature not properly documented, let alone placed on the public record, so the effect of the rule is to undermine corporate transparency and certainty. Sherlock Holmes might have enjoyed the challenge of trying to ascertain precisely how a given company’s affairs are being conducted, but most third parties and, indeed, most members and directors are not detectives, and they are entitled to expect that, for the most part, a company’s official documents reflect a true and complete picture of its internal workings.
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