In this piece, we look at model articles of association (‘Model Articles’) for companies formed in the UK and the impact a recent hearing will have on sole directors.
All limited companies formed in the UK must have articles of association (‘Articles’). The purpose of the Articles is to set the rules that company officers must follow when operating the company in question. Since October 2009, the standard default Articles that limited companies can use has been the Model Articles prescribed by the Companies Act 2006.
However, Re Fore Fitness Investments Holdings Ltd, Hashmi v Lorimer-Wing  EWHC 191, a recent High Court judgement, has raised questions about whether a company, which has adopted Model Articles and has a sole director, can constitute a quorum, ultimately leaving the sole directors decisions open to challenge. The conclusion being that the company would therefore have to appoint another director or amend its Articles, casting further ambiguity on the generally accepted principles that surround the interpretation of these frequently adopted Articles of association.
And whilst the High Court judgement ruled in this way due to the bespoke provision modifying article 11(2), the recommendation encompasses companies that have no amendments to the Model Articles any limited company has adopted.
Going into this in more detail, the regulations under Article 7 requires a quorum to ensure a directors’ meeting is considered valid by any decision of the directors being a majority or unanimous. Article 7(2) further provides that a sole director may take decisions without regard to any of the provisions of the Articles relating to directors’ decision-making. But the challenging element is depicted in Article 11(2), which sets the quorum at two directors unless otherwise fixed, calling the validity of sole directors’ decisions under Model Articles into question.
The decision made by the High Court concluded that the quorum provision requires at least two directors to participate in any board decision and, as such, the company’s sole director had no power to pass board resolutions. The court stated that Model Article 7(2) only permits a sole director to manage a company where no other provision of the company’s Articles requires it to have more than one director. In this case, as the company had Model Articles which required a quorum of at least two directors, Article 7(2) of the Model Articles was disapplied.
Whilst the government may provide clarification or look to amend the Model Articles because of this, for the time being, it is important to consider that where a company has adopted Model Articles and has operated or intends to operate with a sole director, it should:
- Appoint an additional director;
- Ratify the decisions taken by the sole director, which may be deemed beyond their legal powers; and
- Amend its Articles to contain express wording so that Article 11(2) is disapplied where there is only one director and specifically state that a sole director may constitute a quorum (at which point the additional director could resign).
The company’s shareholders could also affect the same by holding a general meeting.
Whilst the risk of not acting on this recommendation could be nominal, the uncertainty remains and should creditors look to claim against the company in the future, the same ruling could apply, hence the recommendation for directors to mitigate such risk.
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