Articles of Association (AA) of a company can have a significant impact on important transactions and lead to unrecoverable losses.
When establishing a limited company, it is necessary to draft a set of Articles of Association (AA). The AA includes mandatory provisions and internal regulations set by the directors that the company must comply with. These provisions cover requirements such as the minimum number of directors, their responsibilities and powers, and details on decision-making processes, such as voting or signing.
The AA is a crucial document required by law and for opening bank accounts, and its regulations must be respected. Failure to do so can result in various potential risks.
Case 1: Halting business transactions and missing out on opportunities
A real-life case reflects how small mistakes can have significant consequences for a company.
The Chen brothers started a jewelry business eight years ago, and when they incorporated the company, all three brothers became directors and shared management responsibilities.
Several years later, the eldest brother unfortunately passed away, and no new director was appointed. The company continued to operate with only two directors.
The clients, unaware of the provisions in the AA, planned to sell the company as both brothers were preparing to immigrate. The buyers, two sisters interested in continuing the business, discovered that the AA stipulated a requirement for three directors, abruptly halting the transaction.
Violating the provisions of the AA is considered illegal operation, and the AA can be revised with the assistance of a professional accountant. It is essential not to wait until the bank freezes the account during a customer data update or when significant changes to the company are hindered. Failure to address these issues promptly can result in missed opportunities and financial losses.
Case 2: Inheriting an estate
After the passing of the company’s founder, the son inherited the property, which was owned by the company. The AA specified a minimum of two directors.
The son overlooked the need to revise the AA, and when conducting a property transaction, the property value experienced a rapid decline between the payment of the deposit and final installment by the buyer.
The buyer wanted to cancel the transaction, and their lawyer took advantage of the seller’s internal issue causing the transaction to stall, using it as an opportunity to negotiate a lower price and avoid assuming the responsibility of fulfilling the terms.
In special circumstances, it is crucial to safeguard oneself. If amending the AA requires the agreement of all directors and one of the directors becomes uncontactable, leaving behind unresolved issues, it is advisable to promptly inform the accountant to handle the matter individually and protect the company from unnecessary risks.
Each industry has its unique business techniques. Consulting with “Maxi Solution Accounting,” an accounting company with over 20 years of experience, can help you avoid many pitfalls and facilitate the growth of your business.
“Maxi Solution Accounting” – an accounting partner that keeps you from falling into traps.
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