• 22 Jul 2022
• •
• 4 min read

Model Articles of Association for private companies: Do sole directors have authority to act?

The suitability of the Model Articles for sole director companies was brought into question by the recent judgment in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), where a counterclaim had been filed by a single director company against an unfair prejudice petition brought by a former shareholder. The validity of the sole director’s decision to file the counterclaim was challenged by the shareholder.

There has been an ongoing debate as to whether Model Article 11 (Quorum for directors’ meetings), in conjunction with Model Article 7 (Directors to take decisions collectively), requires a company to have more than one director to meet the quorum requirements for directors’ meetings. The relevant provisions of the Model Articles are as follows:

Model Article 7 – “Directors to take decisions collectively

(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.”

Model Article 11 – “Quorum for directors’ meetings

(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(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.”

The previous general industry consensus and understanding was that Model Article 7(2) should prevail over article 11(2) and that the latter did not set a requirement for a minimum number of directors, but merely stated that the quorum for meetings was two. This approach relied on Model Article 7(2) stating that in a sole director company “the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making” (which would include Model Article 11(2).

However, it was noted in this judgment that “A provision in the articles requiring there to be at least two directors to constitute a quorum was logically a requirement that the company in question have two directors in order to manage its affairs.” The obiter comments of the High Court suggest that sole director companies would need to amend Model Articles to grant the sole director the requisite power to make decisions: “I agree that amendment is required for the Model Articles to permit for a single director to run a company, but consider that such amendment would need to include the deletion of Model Article 11(2).”

What are the potential issues?

The interpretation adopted by the judge in this case calls into question the validity of the decisions made by a sole director, where Model Articles are adopted without appropriate amendments. This has created uncertainty, especially for parties that are dealing or have dealt in the past with sole director companies, in the event that a director’s decision becomes the subject of a dispute.

What solutions are available?

The judge’s view in this case has come as a surprise to many and may be challenged in future court judgments, given the large number of sole director companies in existence. In the meantime and until (and if) such challenge takes place, companies, or individuals interested in incorporating a new company with a sole director, should consider the following:

Incorporation of new companies:

The company’s articles should be drafted in a non-ambiguous manner, stating clearly that any provisions as to quorum do not apply while there is only one director.

Established companies:

If Model Articles are adopted in their entirety or companies have bespoke articles of association that do not clearly address the relevant quorum provisions:

a. the company could appoint a second director, therefore ensuring that the quorum requirements of Model Article 11 will be satisfied; or

b. the company could amend its existing articles of association to disapply the relevant Model Articles or bespoke articles, for so long as the company has only one director.

Where appropriate, established companies may also wish to consider ratifying any previous decisions taken by a sole director, should their validity be called into question in future.

If you require assistance with reviewing your articles of association or adopting new articles in light of this judgment, please contact a member of our Corporate Team.

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