Model Articles – Does a sole director have that authority to act?
A crucial step when setting up a company is ensuring the company puts into place articles of association. Articles of association form the constitution of a company, setting out the rules which determine how a company operates. They also govern the powers of directors, shareholders, and the company itself.
Articles of association can often be complex and to make it is easier, for those who wish to set up a company the Companies Act 2006 prescribes a default standard set of model articles of association, known as the “Model Articles”. The Model Articles automatically apply to a company, unless a company chooses to adopt an amended version of the Model Articles or adopt bespoke articles of association.
For ease, sole directors have quite sensibly adopted the Model Articles when incorporating their company. However, the recent case Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has questioned the suitability of using the Model Articles for companies with a sole director. This question relates to the effects of Model Articles 7 and 11, which govern the decision-making by directors.
In summary, Model Articles 7 and 11 set out the following:
- Model Article 7(1) sets out the general rule that decision making by directors must be either at a board meeting or by a resolution in accordance with Model Article 8.
- Model Article 7(2) states that where a company only has one director, and its articles of association 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 other provisions of the articles of association relating to directors’ decision-making.
- Model Article 11(1) states unless a directors’ meeting is 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, unless otherwise fixed, 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 decide any decision other than to appoint additional directors or call a general meeting to enable the shareholders to appoint further directors.
The effect of Model Article 11 is that the minimum number of directors present at a board meeting must be two and, if there is less than two directors present, the director only has the authority to appoint additional directors. However, there has been an industry consensus that where a company has one director, Model Article 7(2) empowers the sole director to make any decision and the remaining decision-making articles, including Model Article 11(2), can be disregarded.
However, this consensus appears to have been overruled in Hashmi v Lorimer-Wing. The High Court considered the relationship of Model Article 11(2) and Model Article 7(2), and decided that, where the Model Articles have been adopted, a company must always have two directors to have the authority to manage its business. In short and concerningly, Model Article 7(2) does not override Model Article 11(2).
The case concerned a company which had attempted to submit a counterclaim against an unfair prejudice claim and this was filed by a sole director. The applicant disputed the sole directors authority to pass a board resolution to file the counterclaim under the company’s articles of association. The Court found that the sole director’s decision, was in fact invalid, on the grounds, that Model Article 7(2) does not override the other decision making articles.
This decision has questioned the validity of all decisions made by a sole director where the company has adopted the Model Articles, creating uncertainty for companies with a sole director and any other party who as dealt with such a company. A company may need to ratify any past board decisions to address any potential past breaches and this can only be done by a company’s members.
For the time being it cannot be foreseen whether this decision will be overturned or reaffirmed, or if the Model Articles will have to be amended by the Government to address this recent decision. Although, any amendment to the standard Model Articles would only automatically benefit new companies and existing companies would need to follow the correct procedure, to amend their existing articles of association.
For a new company, the outcome of this case means that if the company is to have a sole director and wishes to adopt the Model Articles, they must be amended to ensure sole directors have authority to manage its business.
For existing companies there are likely to be two solutions:
- The company must appoint a second director. This will satisfy the quorum requirements under Model Article 11(2). Model Article 11(3) allows a sole director to make a decision to appoint additional directors and the shareholders also have the authority to appoint directors by passing an ordinary resolution under Model Article 17(1)(a).
- Amend the Model Articles, by either disapplying Model Article 11(2) where there is a sole director or expressly permitting a sole director to constitute a quorum. A company will require a special resolution passed by the shareholders to amend their articles of association, and it must be noted that a sole director may need to appoint an additional director first before having the authority to recommend a resolution.
If you would like us to review your Company’s articles of association, in light of this article or for any other reason, then please contact our commercial team.