The obligation under the Companies Act 2006 to file articles of association with Companies House is part of the company law regime's efforts to ensure that those who deal with a company have a certain amount of information about its internal arrangements.
In reality, however, a company's articles may tell only part of the story. In many cases, they are supplemented by a shareholder's agreement, which is by nature a private document. In the case of some small companies, too, the shareholders may have a close personal relationship such that a court might be prepared to enforce an informal understanding amongst them as to their conduct of the company's affairs - for example, as to their role in its management - pursuant to its wide discretion to grant relief in connection with an unfair prejudice petition.
What is more, even the articles themselves may not be quite as they appear. Whilst the courts will not rectify them for mistake, they will, on occasion, be prepared to imply terms into them. The law on implied terms is fairly clear, i that the courts will read words into articles only if it is necessary to do so in order to give effect to their meaning, but this is one of those areas in which it can be difficult to apply the law to a particular set of facts. The difficulty lies, of course, in determining what, exactly, articles mean, and the recent decision of the Court of Appeal in Sugarman v CJS Investments  EWCA Civ 1239 provides useful guidance on this question.
The law on implied terms was set out by the Privy Council in Attorney General of Belize v Belize Telecom Ltd  UKPC 10:
'The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contact, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonable be available to the audience to whom the instrument is addressed...'
'... in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.'
As to how the law has been applied in practice, it is fair to say that although the courts have an instinctive reluctance to interfere with the plain wording of a company's articles, they have nevertheless shown themselves to be willing to read words into them in appropriate cases.
- The underlying strictness of the courts' approach can be seen in Bratton Seymour Service Co Ltd v Oxborough  BCC 471, in which the question for the Court of Appeal was whether to imply into a property management company's articles a term requiring shareholders to contribute towards the cost of maintaining the property's amenity areas. Although the articles contained no indication that shareholders were required to make any such contribution, the company argued that it was necessary to imply the term in order to give the articles 'business efficacy' in the light of its promoter's plans for the management of the property. The judges unanimously refused this argument, on the ground that it was not appropriate to imply a term into a set of articles on the basis of extrinsic circumstances. As Steyn LJ put it:
'It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into articles of association from extrinsic circumstances.
Here, the company puts forward an implication to be derived not from the language of the articles of association but purely from extrinsic circumstances. That, in my judgment, is a type of implication which, as a matter of law, can never succeed in the case of articles of association.'
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- On the other hand, Belize Telecom itself is an example of a case in which the court was prepared to imply a term into a company's articles. The articles in question gave the holder of a 'special share' the right to appoint and remove two directors as long as it also held 37.5% or more of a company's issued share capital, but were silent as to the position of any directors who had been appointed pursuant to that right in the event that the level of the special shareholder's shareholding subsequently fell below the 37.5% threshold. Faced with precisely that scenario, the Privy Council held that a term should be implied into the articles to the effect that the directors ceased to hold office. As Lord Hoffman put it in delivering the decision of the Board: 'the implication is required to avoid defeating what appears to have been the overriding purpose of the machinery of appointment and removal of directors, namely to ensure that the board reflects the appropriate shareholder interests in accordance with the scheme laid out in the articles.' The key to the decision lies in the last few words of that excerpt; whereas in Bratton Seymour the term in question would have had to have been implied on the basis of extrinsic circumstances, here the term was implied primarily on the basis of the contents of the articles themselves.
- The Court of Appeal's decision in Cream Holdings Ltd v Davenport  EWCA Civ 1287 was along similar lines to that of the Privy Council in Belize Telecom. The articles in question provided a mechanism for the appointment of an accountant to value the shares of a departing shareholder in connection with a pre-emption provision, and the court implied into them a term requiring the company and the shareholder to co-operate in the process of valuing the shares by agreeing to the reasonable terms of the proposed accountant. Patten LJ, who delivered the only substantive judgment, commented that the implication of the term was 'an obvious and necessary means of giving effect to the contract'.
- The scope of the courts' power to imply a term is wider than it may appear at first glance. In Equitable Life Assurance Society v Hyman  1 AC 408, a life assurance society's articles gave its directors a wide discretion in relation to the payment of bonuses to policyholders, but the question arose as to whether a term should be implied into them to the effect that the discretion would not be exercised so as to undermine guaranteed annuity rates contained in the company's policies. In holding that such a term should, indeed, be implied, Lord Steyn (who delivered the main judgment of the court on this point) took into account not just the wording of the article in question, but also 'its particular commercial setting'. In particular, he noted that the policyholders would not have expected the directors to undermine the guaranteed annuity rates, and felt obliged to give effect to their 'reasonable expectations'. Although Lord Steyn was at paints to stress that the power to imply terms should be used sparingly, the case confirms that a term may be implied not only on the basis of the wording or scheme of the articles themselves, but also on the basis of the wider commercial environment in which the articles operate.