Model Articles: Issues With Sole Director Authority

Background

When a private company limited by shares is incorporated, the Model Articles are, unless otherwise modified or excluded, automatically adopted as the articles of association of the company. A company may adopt, vary or exclude some or all of the Model Articles, if required. However, most companies operated by a single shareholder and director don’t bother to do so.

In the case of Hashmi v Lorimer-Wing, the court gave a judgment that called into question the market wide approach of adopting Model Articles by default for any private company limited by shares. The court held that the Model Articles are not suitable for adoption by a private company limited by shares with a sole director. The court ruled that Model Article 7 (which states that (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.) and Model Article 11 (which states that (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.) impose a requirement on the company to have at least two directors in order to make decisions. A sole director, therefore, may only act to appoint an additional director, or convene a general meeting in order to do so, under the Model Articles. He/she may not do anything else, and any other action is ultra vires (meaning that the company cannot do it).

Despite the longstanding contradiction between Model Articles 7 and 9, prior to this case it was widely understood that Model Article 11(2) did not impose a requirement for a company to have at least two directors, but that it simply provided what the quorum should be if there is more than one director.

What do single director companies need to do now?

Following the ruling in Hashmi v Lorimer-Wing, a private company limited by shares with a sole director which has adopted the Model Articles, without the necessary modification, should now:

• amend its articles of association to allow its sole director to make valid decisions, by providing for a quorum of one director if there is a sole director, but a quorum of two directors if there is more than one director, and separately confirming that, notwithstanding Model Article 11 or any other provision, the company is expressly not required to have more than one director and the minimum number of directors shall be one; or
• appoint a second director; and
• given that any modification of the Model Articles would not have a retrospective effect, pass shareholder resolutions to ratify any actions taken by such sole director.

It is also important to note a number of practical implications, including:

• even if the company does not have a sole director now, it may have in the future and so it may be preferable to change the quorum to one;
• the validity of acts taken by sole directors in companies with Model Articles is now likely to be called into question; and 
• sole director companies could be in breach of existing contractual agreements, and in the event that there was a dispute, the other party could claim the sole director could not properly have entered into the agreement.

Further assistance

If you would like assistance with amending your articles of association to deal with this issue, please contact Buckworths on 020 7952 1723 or [email protected].