Sole Director Companies with Model Articles

Posted on 19th April, 2022

Are you a sole director of a company that has adopted Model Articles? Stephanie Langdon of our Corporate Team sets out the risks involved and why it may be prudent to review your Articles to check for any potential conflict.

Sole directors of companies that have adopted Model Articles may find they are unable to make valid decisions. Unmodified Model Articles are automatically adopted upon the incorporation of a company limited by shares unless the company chooses to modify them or adopt bespoke Articles.

The Model Articles for private companies limited by shares deal with decision-making as follows:

  • Model Article 7(1) sets out the general rule that directors must make decisions either at a Board meeting or by written resolution in accordance with Model Article 8.
  • Model Article 7(2) provides that where a company only has one director, and its Articles do not require it to have more than one director, the general rule does not apply and the director may make decisions without having regard to the provisions of the Articles relating to directors’ decision-making.
  • Model Article 11(1) states that if a directors’ meeting is not quorate, no decision can be voted upon other than to call another meeting.
  • Model Article 11(2) allows the directors to fix the quorum for directors’ meetings from time to time, but it must never be less than two directors and, if not decided otherwise, it shall be two.
  • Model Article 11(3) states that if the number of directors at a directors’ meeting is less than the quorum required, then the directors must not make any decision other than a decision to appoint more directors or call a general meeting to enable the shareholders to appoint further directors.

In a recent case – Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) – the High Court held that the provisions of Model Article 11 conflict with Model Article 7. In that case, the claimant (a shareholder in the company) sought an order that the counterclaim served by the company should be struck out. The claimant argued that the Articles of the company, which were modified Model Articles, required there to be two directors for a directors’ meeting to be quorate (Article 11(2). The company only had one director. As a result, the claimant stated the director had no power to serve the counterclaim on the company’s behalf.

However, the company argued that Model Article 11(2) was not a requirement for there to be at least two directors in the company. Instead, it merely dealt with the situation where there were multiple directors. Where there was a sole director, Model Article 7(2) applied. Model Article 7(2) allows a sole director to ignore the remaining provisions regarding directors’ decision-making in the Model Articles. The director of the company could, therefore, make decisions alone.

The company further argued that if the purpose of Model Article 11(2) was to require a minimum number of directors, it would conflict with the provisions of the Companies Act 2006. The Companies Act 2006 required a company to have at least one director. The company stated that the Model Articles could not abrogate the provision of an Act of Parliament.

The Court granted the claimant’s application. It held that Model Article 7(2) would only apply where the Articles did not require there to be more than one director. Model Article 11(2) set out a requirement for two directors to be present for a meeting to be quorate. It held that this was a requirement for the company to have two directors to manage its business.

It further held the Model Articles did not conflict with the Companies Act 2006. A company was not obliged to adopt Model Articles. Companies could still be properly run by a sole director; the Model Articles would simply need to be amended, or bespoke Articles adopted, in order to make valid decisions.

As a result of this recent case, companies that have a sole director and which have adopted Model Articles may wish to amend them so that they specifically state Model Article 11(2) is not a requirement for there to be a minimum of two directors. They may also wish, where appropriate, to ratify any decisions made by a sole director in the past.

If you would like your Articles reviewed and/or amended to ensure your company will not be caught by these provisions, please get in touch with our Corporate Team.

 

 

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