Model Articles: are decisions made by sole directors valid?
Articles of association are a fundamental part of a company's constitution. Articles regulate the internal affairs of a company and form a contract between each shareholder and the company itself; provisions must be followed by directors and shareholders.
It is a legal requirement for every UK company to have articles of association and, unless you have obtained bespoke articles of association, you will have automatically adopted the Model Articles by default on incorporation of your company.
Articles (including the Model Articles) govern many essential areas of running a company, for example:
- the general authority and powers of directors to bind the company;
- how directors are to make decisions;
- appointing and terminating directors; and
- payment of dividends and return of capital;
Given that the Model Articles are the default articles of association that apply to every UK company upon corporation, you would assume that they are suitable for use by sole director companies. Certainly, the industry consensus is that the Model articles are suitable for companies with just one director, but the very recent decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) suggests otherwise.
The case centred on directors' decision making and Model Articles 7 and 11 in particular:
Article 7:
7(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
(2) If - (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors' decision-making.
Article 11:
(2) The quorum for directors' meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision - (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.
In this case, the company had attempted to submit a counterclaim against a claim brought by a former shareholder. The sole director, on behalf of the company, filed the counterclaim. The claimant argued that Model Article 11(2) required there to be 2 directors and, as such, the sole director had no power to direct that the company file the counterclaim.
The sole director argued that Model Article 11(2) did not require a company to have a minimum number of directors; it simply dealt with situations where there was more than one director of a company. The Sole director argued that Model Article 7(2) dealt with the position where there was only one director, and that it overrides Model Article 11 to enable sole directors to make decisions on behalf of the company validly. This interpretation is, in fact, the industry consensus.
However, surprisingly, the court decided that the sole director lacked the power under the Model Articles to file the counter claim and had acted beyond his power and authority. The court decided that Model Article 11 expressly requires a company to have two directors and that the Model Articles must be amended to permit sole directors to take decisions validly.
The decision in this case creates uncertainty for anyone who deals with (or has dealt with) sole director companies incorporated with the Model Articles because the validity of acts and decisions taken by sole director companies is likely to be called into question.
When this issue comes before the court again it is hoped that a different decision will be taken, but, until then, sole director companies with Model Articles may need to:
- appoint a second director to ensure that future decisions are valid and meet the quorum requirements of Model Article 11;
- amend the Model Articles to expressly provide that Model Article 11(2) does not require the company to have more than one director;
- ratify some or all of the past decisions made by the sole director to ensure that those decisions are not invalid.
If you need any assistance to amend your articles of association in light of this decision please contact the Corporate and Commercial Team.