Model Articles and their Compatibility with a Company Appointing a Sole Director
The High Court has recently considered the interpretation of the Model Articles for private companies in Hashmi v Lorimer-Wing (2022) EWHC 191 (Ch). Their decision suggested that Model Articles (without amendments) are not suitable for companies with only one director appointed.
The case related to an unfair prejudice petition being brought under section 994 of the Companies Act 2006.
The petitioner contended that the sole director had no power to direct the Company to file a counterclaim as the Company’s Articles, and in particular Article 16.1, required two directors for a board meeting to be quorate (subject to MA11(3)(a) and (b)). Therefore, the High Court had to decide whether the sole director had authority to act.
The High Court found that the sole director did not have authority. Article 16.1 required two directors for board meetings to be quorate, and therefore the company was required to appoint at least two directors. This meant Article 7(2) did not apply, as a provision in the Articles required the company to have more than one director.
The Model Articles would also need to be amended to authorise a single director to run a company, which included the removal of MA 11(2).
The decision in this case is at odds as to the common interpretation of the Model Articles. The common interpretation is that Model Article 11(2) provides the quorum for a company should it have more than one director appointed, and that it is not a requirement for a company to have two directors. This was on the basis that Model Article 7(2) superseded any other provisions when there was a sole director. However, this decision casts doubts on that interpretation.
Private companies already incorporated which adopt model articles (without amendments) and which have a sole director appointed should consider amending its articles. The amendments would need to ensure the sole director can make valid decisions.
If you are considering incorporating a private company with a sole director, you should ensure the Articles adopted at incorporation provide the authority required to make decisions.
Detail of the Company’s Articles of Association
The Company’s Articles of Association were a combination of Model Articles and bespoke articles.
Model Article 7 (Directors to take decisions collectively) was incorporated into the Company’s Articles. This provided that:
7 (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.
7 (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) was also incorporated into the Articles, subject to the bespoke article 16 referred to below. MA 11 states:
11 (1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
11 (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.
11 (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.
To summarise, bespoke Articles 16.1 and 16.2 stated that the quorum for meetings of the Board was two directors.