Are Model Articles Suitable for Companies with a Sole Director?

Model articles have hit the business news pages recently with two conflicting high court cases regarding the ability of a sole director to bind a company. We review these two recent cases and consider if model articles are still suitable for companies with a sole director.

What are articles of association?

It is important to note that all UK companies must have a set of Articles of Association. The Articles of Association (Articles) set out the rules on how a company should be governed. The Articles include provisions such as how the directors should make decisions in managing the company, the rules and process for the transfer of shares, and the procedures required for carrying out a board meeting.

What are model articles?

The model articles are the default set of Articles of Association a company can use. They are prescribed by the Companies Act 2006. Many companies in the UK adopt model articles as they can be a good starting point and they cover the key provisions needed in a company’s Articles.

Hashmi v Lorimer-Wing

In a recent case named Hashmi, the suitability of using the model articles for companies with a sole director was questioned. The case involved whether a company had the ability to bring a claim when it had only one director appointed. In this case, the company had adopted articles of association based on the model articles with some bespoke provisions.

The main question of this case relates to the relationship between article 7 (directors taking decisions collectively) and article 11 (the number of directors who are required to be at meetings).

Directors taking decisions solely or collectively

Article 7 states that directors are required to make decisions collectively and any decision made by the directors must be a majority decision at a meeting unless a company only has one director where the general rule relating to decision-making by directors would not apply. In other words, the sole director may take decisions without regard to any of the decisions of the Articles relating to directors’ decision-making.

How many directors should be at meetings?

On the other hand, article 11 states that the quorum for directors’ meeting may be fixed from time to time, but it must never be less than two, unless otherwise fixed. If the total number of directors is less than the quorum, the directors must not take any decision, other than a decision to appoint additional directors or to call a general meeting to permit the shareholders to appoint additional directors.

Here, article 11 clearly contradicts article 7. When the court considered this case, it decided that where the model articles have been adopted, a company must always have two directors to have the authority to manage its business. The court determined that although a company can operate with a sole director it is required to have two directors to constitute a board for decision making. Therefore, any decision made by the sole director would be outside of their authority of the board.

This decision has put the validity of all decisions made by a sole director where the company has adopted the model articles into questions, creating uncertainty and concern for companies with a sole director and any other party who has dealt with such a company.

Re Active Wear

Since Hashmi, there was another recent case Re Active Wear where the High Court ruled that the decision of a sole director in a company with unamended model articles was valid notwithstanding the earlier decision in Hashmi. The company in this case had adopted unmodified model articles. In other words, the company has always been using the model articles without changing any of its contents.

The court in this case determined that where the unmodified model articles are in place, they ought to be read as a whole.  Article 7 would effectively be stripped of any practical meaning if article 11 is also in play. Therefore, the court concluded that the sole director may make their own decisions for the company. Accordingly, the sole director had the authority to make the decision and that decision remained valid.

Conclusion

Even though Re Active Wear is not yet publicly available, it does not mean the decision is not binding. The decision in Re Active Wear will have the same authority as any other High Court decision such as Hashmi. As things stand, in the position post Re Active Wear, it appears that a sole director has the power to make decisions for the company if the company adopts unmodified model articles. However, the position is much less clear if the company has been operated by more than one director in the past.

Given the present uncertainty, it is advisable to proceed carefully. Until the court clarifies, or the government intervenes, the safest course of action is either to amend the provisions of the model articles to clarify that a sole director has clear and unequivocal authority to bind the company or to appoint an additional director to ensure that any meetings of the company meet the necessary requirements.

Here to Help

For advice about model articles, articles of association and directors’ duties, please get in touch with Michael Budd, Partner and Head of Company Commercial.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.