If your business was established using the unmodified Articles of Association or “Model” Articles, it would be wise to ask your solicitor to review them. Where it was previously accepted to govern under these Model Articles, there has been a change in recent months where a High Court ruling (Hashmi v Lorimer-Wing 2022) questioned the validity of decisions a single director makes in respect of their company. This ruling is undergoing appeal, which could take months or even years to conclude, but any changes to the Model Articles would still not be effective retrospectively and would only apply to new companies adopting the amended Model Articles.
These were first published in 2008 and are generic articles of association that many UK companies use when starting up. Two articles under the Decision-Making by Directors section raise particular concern for single-director companies as they are contradicting:
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 … [unanimously by all eligible directors].
(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 make decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
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) call a general meeting so as to enable the shareholders to appoint further directors.
In the court case, it was determined that the requirement for a quorum of 2 directors set out in Model Article 11(2) does impose a requirement for the company to have more than one director, meaning Model Article 7(2) can’t guarantee to overrule the other decision-making procedures.
The findings of this case effectively mean that the Model Articles must always be amended if the company is to have only one director.
• To address any potential past breaches, significant past board decisions can be authorised by the company’s members.
• To prevent further future breaches:
o A) one or more additional directors can be appointed
o B) the articles of the company can be changed to confirm and clarify that there is no requirement for a minimum of two directors
o C) directors could await the result of the ongoing appeal as the lower court ruling may well be overturned (the currently ruling will affect thousands of UK companies)
It is noteworthy that Model Article 11(3) does not allow a sole director to take any action other than to appoint a new director, thus posing the question: how can a sole director recommend a shareholder resolution to amend the articles or ratify past decisions?
In any case, we are here to help our single-director client companies either instruct a solicitor to amend articles, or talk through the option of appointing further directors. Please get in touch with your dedicated accountant or by emailing firstname.lastname@example.org or calling on 01249 691360.