Sole directors and model articles – what’s the issue?
When setting up a new company, one of the things you will be asked is whether you wish to adopt “Model Articles” or whether you wish to have bespoke articles of association prepared instead.
A company’s articles of association function as its rule book, determining how that company operates, and how the company regulates the powers, affairs and relationships of the members (i.e. shareholders), directors, and the company itself.
Many companies choose to adopt bespoke articles of association, tailored to their company’s needs; however, where a company does not have a need or desire for such bespoke articles, the default position is that they will adopt the standard articles of association. These were historically referred to as Table A (for private limited companies). Table A was intended to be suitable for most companies, in most circumstances. Table A was later replaced by the Model Articles for private limited companies, under the Companies Act 2006. The Model Articles replaced Table A with a view to making the generic, specimen articles more relevant to modern companies.
Sole directors, particularly of small businesses, have often taken the approach that the Model Articles are suitable for their company and, historically, that would have considered a sensible approach. However, the suitability of the Model Articles for companies with a sole director was brought into question by the recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch).
In the Hashmi case, the High Court was concerns with the effects of Model Articles 7 and 11, which govern the decision-making by directors.
Under Model Article 11(1), a company cannot make any decisions at a directors’ meeting unless that meeting is quorate. Model Article 11(2) allows the directors to fix the quorum for directors’ meetings from time to time, but it must never be less than two directors and, unless otherwise fixed, it shall be two. On that basis, it would seem that a sole director can never make a decision as no meeting held by them would be quorate. However, Model Article 7(2) states that, where a company only has one director (and its articles of association do not require it to have more than one director) the general rule does not apply, and the director may make decisions without having regard to the other provisions of the articles of association relating to directors’ decision-making.
The general consensus has always been that Model Article 7(2) acts to remove the requirement to have at least two directors to form a quorum in accordance with Model Article 11(1) and 11(2). This consensus appears to have been overruled in Hashmi.
In Hashmi, the High Court decided that, where a company has adopted Model Articles, it must always have two directors to have the authority to manage its business: Model Article 7(2) does not override Model Article 11(2).
Understandably, the decision in Hashmi has put into question the validity of all decisions made by a sole director where the company has adopted the Model Articles. This has inevitably created uncertainty for companies with a sole director and any other party who as dealt with them.
What can a sole director company do to fix the problem?
Sole directors have a couple of options available to them.
The simplest approach to solving the issue is to appoint a new director so that the requirement to have two directors, under Model Article 11(2) is fulfilled. As the sole director cannot make a decision to appoint another director, because they are unable to form a quorate board meeting, the appointment of a second director would need to be passed by a resolution of the members (shareholders).
Alternatively, you could amend your articles of association so that they are amended Model Articles or adopt entirely new bespoke articles of association. Amending the company’s articles of association is particularly useful if appointing a new, second director is not feasible for your company.
The main purpose of the amendments would be to amend any provisions that make Model Article 11(2) inapplicable. This would then mean that all decisions made by a sole directors remain valid, and you do not need to appoint a second director.
The members (shareholders) of a company can request a general meeting or obtain written permission from the company’s sole director to circulate written resolutions for the amendment to the Model Articles. Once passed, these resolutions would amend the articles of association and remove the sole director issue.
You should note that, where a resolution is passed, a copy of the resolutions needs to be filed with Companies House before the filing deadline stipulated by Companies House (currently, 15 days from the date that the resolutions were passed).
In each case, whether you appoint a second director or amend the company’s articles of association, you will need to ratify all previous decisions made by the sole director for them to be valid (and to prevent those decisions being challenged in the future). This can be achieved by the passing of a written resolution of the company’s members.
If you are a sole director of a company with Model Articles, or wish to discuss your company’s articles of association generally, speak to one of our specialist Corporate solicitors today on 01244 310 022 or at law@jolliffes.com
