A recent High Court ruling has cast doubt on the validity of decisions made by companies with sole directors who operate under Model Articles.
To avoid challenges to the validity of decisions made, single director firms using Model Articles are being strongly advised to review their articles of association.
All UK companies must have at least one director, along with articles of association, which set out how the company will operate. These can be bespoke or Model Articles can be used.
Model Articles are generic articles of association which can be adopted in their entirety, modified or replaced by bespoke articles.
Unless specifically modified or amended, the position in relation to decision-making by the directors of a company under the Model Articles is as follows:
- The general rule about decision-making by directors is that decisions must be passed by a majority or unanimously by all eligible directors (Model Article 7(1));
- If a company has only one director and its articles of association do not require it to have more than one director, the general rule above does not apply, and the director can make decisions without regard to the provisions of the articles relating to directors’ decision-making (Model Article 7(2));
- The quorum for directors’ meeting may be fixed from time to time but it must never be less than two, and unless otherwise fixed it is two (Model Article 11(2)); and
- If at any time the total number of directors is less than the quorum, the directors must not take any decisions other than to appoint further directors or to convene a general meeting to enable the shareholders to appoint further directors.
The general consensus has previously been that Model Articles 11(2) and 11(3) do not apply to companies with single directors by virtue of Model Article 7(2). However, the recent High Court decision (in Hashmi v Lorimer-Wing  EWHC 191 (Ch)) has brought this reasoning into question.
It was noted that the articles requiring there to be at least two directors to constitute a quorum was logically a requirement that the company in question must have two directors in order to manage its affairs using the Model Articles. Single director companies are permitted under section 154 of the Companies Act 2006, but the finding means that unmodified Model Articles should not be used in respect of single director companies and should be amended to take account of the quorum issue.
What does this mean?
Single director companies are advised not use unmodified Model Articles and any decisions taken by a sole director who has been using unmodified Model Articles may be invalid and open to challenge.
What action should sole directors take?
Sole director companies should immediately review their articles of association to consider whether any amendments are necessary and whether previous decisions made by the sole director are valid.
It might be necessary to amend the articles to make clear that a sole director does constitute a quorum and may make decisions on behalf of the company in order to ensure the validity of all decisions made in the future.
If you need advice about bespoke or Model Articles or need your articles reviewing in light of this decision, please don’t hesitate to contact our corporate and commercial team by emailing email@example.com or phoning our Stoke-on-Trent solicitors on 01782 205000 or our Altrincham solicitors on 0161 929 8446.