Why failing to file documents can do real harm to your business

Why failing to file documents can do real harm to your business

Company directors have obligations to file certain information and documents with Companies House within specified time frames.

Failure to file certain information or documents on time with Companies House may damage the company’s reputation and result in the offending company’s directors being fined and/or convicted of a criminal offence.  In addition, directors may easily overlook the other, less obvious, consequence of failing to file certain information with Companies House; litigation.

Although in the majority of cases, litigation is unlikely to be the most common outcome, the recent case of Gunewardena v Conran Holdings Limited [2016] is a perfect illustration of the importance of filing certain documentation with Companies House altogether.

In 1993 the members of Conran Holdings Limited (CHL) adopted new articles of association which would provide an employee shareholder with a fair value for their shares on the termination of their employment with either CHL or a subsidiary of CHL. Sometime after in 1995, the members of CHL resolved to amend the company’s articles by replacing the fair value mechanism for a valuation based upon a multiple of annual profit over two accounting periods.

In 1998, further amendments were made to CHL’s articles which omitted to reflect the change in valuation method. The 1998 amended articles therefore contained the fair value mechanism, not the valuation based upon a multiple of annual profit.  This error was subsequently spotted and the error was rectified by a member’s resolution however, these corrected articles were never filed with Companies House so that the version registered with Companies House still contained the fair value mechanism.

An employee of CHL’s subsidiary later ceased employment with the group and in accordance with the contents of the corrected articles (to reflect the multiple of annual profit mechanism), CHL applied the multiple of annual profit mechanism to value the employee’s shares. As noted above, these corrected articles were not filed with Companies House. The valuation mechanism would have resulted in the employee receiving nothing as there had been losses in two relevant accounting periods.

In contrast and unsurprisingly, the employee relied upon those articles which had been filed with Companies House (the fair value mechanism) (despite the fact they had been superseded), on the basis that only once registered with Companies House, they take effect as a statutory binding contract. The fair value mechanism would have resulted in a valuation of £3million.

Rejecting the employee’s argument on the basis that registration alone does not vest articles with a special quality of being the real articles, the High Court highlighted, amongst other things, that:

  • filing articles is a statutory obligation on a company; if the right articles are filed the obligation is fulfilled; if the wrong articles are filed, the obligation is not fulfilled; and
  • the real articles of a company are those which its members have resolved to adopt as the articles of association of the company from time to time.

Although this case demonstrates that the registration of articles with Companies House will result in the fulfilment of a statutory obligation, it more importantly reinforces the significance of filing complete, accurate and up to date information with Companies House to avoid, amongst other things, protracted and costly litigation.

Our team at Mackrell Turner Garrett can assist you with your filing and administrative obligations via its dedicated company secretarial service.  If you would like more information, please contact corporate@mackrell.com.