High Court rules on Articles of Association

High Court rules that Model Articles of Association are not suitable for Limited Companies with a Sole Director.

Our company law specialist Mignonette Ellis discusses the potential issues arising from the recent decision.

A High Court decision has questioned the suitability of model Articles of Association for single director companies.

What are model Articles?

The Articles of Association are essentially the rule book for the running of a company.  They are filed at Companies House and are publicly available.  Model Articles are pre-drafted Articles of Association referred to in the Companies Act 2006 available for adoption by all limited companies.

Sole Director Companies

It is common for small limited companies to have a sole director and to have adopted model Articles without any amendments when the company was originally incorporated.  This is often the most straight forward way of bringing a new company into existence at minimal cost.  The recent High Court decision in Hashmi v Lorimer-Wing [2022] has highlighted an issue with this approach.

Conflicting Articles

The conflict is between model Article 7(2) and model Article 11(2), specifically which Article supersedes the other.

Model Article 11(2) requires a minimum of two directors to be in attendance for a directors meeting to take place (to form a quorum), otherwise no proposal can lawfully be voted on or passed at that directors meeting.

However model Article 7(2) disapplies the decision making requirements set out in the Articles, including model Article 11(2) provided certain criteria are met.

Until the recent High Court decision, it had seemed logical that the decision making requirements imposed by the model Articles would be disapplied in the circumstance that there is only one director. The requirement that two directors are needed to hold a board meeting would prevent a director passing board resolutions where there is only one director for the company.

Model Articles deemed unsuitable for sole director companies by High Court

It was held by the High Court that “a provision in the articles requiring there to be at least two directors to constitute a quorum logically is a requirement that the company in question have two directors in order to manage its affairs”.

The fact that model Article 11(2) states there must be a minimum of two directors to form a quorum has been interpreted by the court to mean that the company must have a minimum of two directors.  As a result of that decision the criteria in model Article 7(2) will not be met by a sole director company and accordingly the rule in model Article 7(1) relating to directors decision making powers cannot be disapplied.

It should be noted that in this particular case the Articles were amended to include a bespoke Article requiring that two directors are required to meet the quorum of a board meeting but the requirement echoed model Article 11(2).

The consequence of this is that board decisions cannot be passed at meetings as there will not be a quorum but additionally model Article 8 which enables decisions to be made by directors in writing (rather than at a meeting) prevents a decision being taken if the directors making the decision would not have formed a quorum at a directors meeting.  A single director would not form the quorum (if the model Articles have not been amended) and so cannot make a decision whether in a meeting or in writing.

How to resolve the issue

The appointment of an additional director would resolve this issue however that is not always desired or feasible in all the circumstances.

To avoid the risk of dealing with the implications of the decision by the High Court and conflicting supremacy of either model Article, you should consider adopting model Articles with amendments to provide that a sole director can make valid decisions. This should allow a sole director to then lawfully make decisions for the company including where there is a conflict of interest in certain circumstances.

How can we help?

These changes to the Articles can be implemented by a shareholder resolution in order to provide the necessary decision making power to a sole director.  We offer a fixed fee service to (a) review your existing Articles and confirm whether the issue highlighted by the High Court affects your company; and, if so (b) prepare amended Articles for your company together with the necessary shareholder resolution.

Our fee for each of these services will be notified to you at the outset and will be fixed so you can budget accordingly without the risk of unexpected costs.

If you wish to discuss this further with one of our Company Law specialists please call us on 01474 546013 or email enquiries@martintolhurst.co.uk.