Company Formation and Constitution for SQE1

Business Law and Practice > Company Formation and Constitution

This is one of the highest-yield traps in SQE1: candidates still state that the memorandum contains the objects clause. It hasn't since the CA 2006. If you don't know what documents actually incorporate a company—and how the articles create a statutory contract that outsiders cannot enforce—you will drop marks on questions that reward precision over recall.

What is Company Formation and Constitution in SQE1?

Company formation is the process of creating a legal entity by registering at Companies House. The company's constitution is the set of rules governing its structure, powers and decision-making. It consists of:

• The memorandum (statement of association under s.8 CA 2006)
• The articles of association (principal constitutional document under s.18)
• Any shareholder resolutions or agreements
• The certificate of incorporation (proof of registration under s.15)

The constitution determines who can make decisions, what powers directors have (subject to their statutory duties), and how members' rights are protected.

Key Principles for SQE1

• Registration (s.9 CA 2006): A company is formed by delivering a memorandum and articles to Companies House along with Form IN01 (incorporation application) and the requisite fee. The Registrar issues a certificate of incorporation, creating the company as a legal entity from that date. This is a key incorporated business structure that confers separate legal personality.

• Memorandum of association (s.8 CA 2006): A simple statutory document stating that the subscribers wish to form a company and agreeing to become members. Unlike the historical position, the modern memorandum no longer contains an objects clause (statement of what the company can do). This change is a critical SQE1 distinction.

• Articles of association (s.18 CA 2006): The primary constitutional document regulating the company's internal affairs. Articles cover: board powers, shareholder meetings, voting, dividends, share transfer, director removal, and all procedural rules. The articles determine how company management and decision-making will operate, and they constitute a statutory contract (s.33) binding the company and members.

• Statutory contract (s.33 CA 2006): The articles operate as a contract between the company and each member in their capacity as member. This means:

• Members can enforce the articles against the company

• The company can enforce the articles against members

• Members cannot enforce the articles against each other in their individual capacity (Eley principle)

• Outsiders (non-members, creditors) cannot enforce the articles, even if they benefit from them (Eley v Positive Government Security Life Assurance Co (1876))

• Model articles (s.20 CA 2006): Default articles that apply automatically if the company does not register its own. The Companies (Model Articles) Regulations 2008 set out model articles for private companies limited by shares (most common), public companies, and companies limited by guarantee. SQE1 assumes model articles unless told otherwise.

• Objects clause: Historically, articles stated what the company could do. The CA 2006 removed this requirement. Under s.31, a company's objects are now unrestricted (the company has full capacity) unless the articles expressly limit them. This flexibility is a key 2006 reform.

• Alteration of articles (s.21 CA 2006): Articles can be altered by special resolution (75% shareholder approval). However, the alteration must be bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa Ltd [1900]). A member cannot use their votes to alter articles purely for personal advantage at the expense of other members, which ties into shareholder rights and capital rules.

Exam tip

If a question mentions a "right" in the articles that benefits a non-member (e.g., a solicitor named as company secretary), apply Eley immediately. The articles are a s.33 contract between company and members only—outsiders cannot enforce them, no matter how clearly the right is stated.

Certificate of incorporation (s.15 CA 2006) - The Registrar issues this document as conclusive proof that the company is registered and validly formed. It shows the company number, name, date of incorporation, and whether it is limited or unlimited. The certificate is the company's "birth certificate".

How This Appears in SQE1 Questions

For example, a question might describe a company formed under CA 2006 and ask: "The articles restrict what the company can do. Does a third party (non-member) have any claim if the company breaches the articles?" You'd apply Eley to conclude that the outsider has no claim.

SQE1 questions commonly test:

• "What documents are required to incorporate a company?" (Memorandum, articles, Form IN01)
• "Do the articles operate as a contract with X?" (Analyse s.33 - usually member vs company, rarely outsider)
• "Can the partner/creditor enforce the articles?" (No - Eley applies)
• "What is the effect of the model articles in this scenario?" (Apply default rules unless articles expressly varied)
• "Can the company change its objects?" (Yes - no objects clause now unless expressly restricted)

This is a classic SQE1 trap. Assuming the memorandum still contains an objects clause (it does not under CA 2006). The objects clause was abolished, and the company has unrestricted capacity unless the articles say otherwise.

Another trap: thinking outsiders can enforce articles if they benefit from them. Eley establishes clearly that articles are a contract between company and members only.

Common Mistakes Students Make

• Assuming the memorandum contains an objects clause. Under CA 2006, it does not. The objects clause is not required; the company has full capacity unless articles restrict it.
• Forgetting that model articles apply by default. If the company does not register articles, the statutory model articles automatically apply.
• Thinking outsiders can enforce articles. Articles do not create enforceable rights for third parties (Eley). Only members can enforce against the company.
• Confusing the memorandum with the articles. The memorandum is a simple incorporation document; the articles are the detailed constitutional rules.
• Misunderstanding s.33 contract. Articles bind the company to members in their capacity as members, but members cannot use articles to bind each other in individual capacity.

Quick Summary

• Registration requires memorandum, articles, and Form IN01; certificate of incorporation is conclusive proof
• CA 2006 removed objects clause; companies now have full capacity unless articles restrict it
• Section 33 creates statutory contract between company and members (not between members individually, per Eley)
• Model articles apply automatically unless company registers its own; s.20 sets defaults for private and public companies
• Articles can be altered by special resolution (75%) but alteration must be bona fide for company benefit (s.21)
• Third parties cannot enforce articles; Eley principle limits enforceability to company and members

Want to test this now? Try a few SQE1-style questions below before moving on.

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Related Topics

• SQE1 Business Law and Practice: Complete Guide
• Types of Business Organisations
• Company Management and Decision-Making
• Directors' Duties and Liabilities
• Shareholders and Share Capital

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