Are Your Company Rules Fit For Purpose?

In the Bahamas we can use several corporate structures to help clients set up and run their business. These include the International Business Company (IBC) and the Limited Liability Company (LLC). Incorporation of a company in the Bahamas is a relatively straightforward, quick process. It often involves the purchase of a ‘shelf company’ with standard company documents like the Articles of Association and Memorandum of Association. The Memorandum (the signed agreement by all shareholders to form the company) and the Articles (the company rules agreed by shareholders and directors) provide a legal framework for running the company. Frequently the Articles will be amended to reflect the specific circumstances of the business and the way shareholders and directors want the company to function from day to day.

But what happens if there is an inconsistency between the standard articles and any bespoke articles introduced by the company? Below we look at the English High Court litigation that ensued when a company inserted its own provision about director meetings into standard Articles of Association that appeared to create a contradiction about how many directors were required to take decisions on behalf of the company. As a decision of the English High Court the case is of interest to us in the Bahamas as it will inform  the way judges here approach the issues raised. 

ParrisWhittaker is a team of award-winning lawyers headquartered in the Bahamas and with offices in the Bahamas, Turks and Caicos and overseas. We advise on company and commercial matters and are on hand to provide practical guidance when a legal dispute arises. We’re available on 1-242-352-6110 and 1-242-352-6112 or you can always contact us online. 

HASHMI v LORIMER WING: CAUTION IF CHANGING STANDARD ARTICLES OF ASSOCIATION

In the UK the so-called Model Articles govern every company unless the company proactively changes them or excludes specific provisions. 

Hashmi v Lorimer Wing involved a dispute between directors of the company, Fore Fitness Investment. A director Mr Lorimer Wing had, on behalf of the company, filed a counterclaim against a former director Mr Hashmi. When the counterclaim was filed Lorimer Wing was the sole director of the company. Mr Hashmi argued that the counterclaim was invalid because a specially created provision in the Articles stated that for a director’s meeting to be valid at least two directors had to be present

The Articles of Fore Fitness Investment were a mix of the Model Articles and bespoke provisions agreed around the time the business was incorporated. The High Court agreed with Mr Hashmi that there was a degree of confusion caused by the retention of the relevant Model Articles. However, the bespoke provision requiring at least two directors at Board Meetings meant Mr Lorimer Wing’s had been issued without the authority of the company. As a result, the court could not hear the claim or make any decision on it.  

COMMENT

The case makes it clear that –when using the UK Model Articles at least – it’s crucial to decide what the quorums are for director meetings and how many directors are needed to act on behalf of the company. Even before the Lorimer Wing case the Model Articles had been criticised because they appeared to indicate on the one hand that at least two directors are needed for a valid meeting but on the other they state that a company can act with one director. More than ever it’s important to nail these provisions when eth company is formed. 

In the same way that standard contract terms should always be reviewed before using them in a commercial contracts it’s crucial that Articles of Association and other company documents are appropriate for your circumstances. 

Inconsistencies in the company documents can invalidate even the most fundamental actions of a company.  Too often we come across situations where company officers have not properly considered what they can and cannot do under the terms of standard form articles. This can lead to expensive and time-consuming disputes. 

CONTACT US 

For advice on company structures and guidance on any dispute that has arisen within your company feel free to reach out to us at ParrisWhittaker for an initial, no-obligation discussion.