The problem facing single director companies

Recent Court judgments have called into question the ability of a sole director of a limited company to make decisions where the company has unamended model articles of association. The validity of previous decisions made by a sole director have also been called into question. This is particularly concerning as sole director companies are a popular business model.

The good news is, there is solution to deal with this potentially serious issue.

What is the issue?

The unfortunate consequence of adopting unamended model articles where there is only one director is you may be prevented from making decisions alone and any decisions that have been or will be made could be potentially invalid.

This arises as a result of the model articles requiring a minimum of two directors to be present for a board meeting to be validly held. In the event that there is only one director, the meeting cannot go ahead. This is worsened by the express permission set out in the model articles that the only thing a sole director can do is appoint another director.

It was previously assumed that model article 7(2) overruled the requirement for a single director to comply with the articles that related to a multiple director company but it is not clear if this is still the case.

Why you should not avoid or delay dealing with the issue

Validity of decisions

It could be found that you did not and do not have the legal power to make decisions as a director of the company in the event that two directors are required under the articles of association. All past and future decisions would therefore be invalid.

The validity of your decisions can impact of your ability to obtain a loan/finance from a lender or from future shareholders who could inject cash into the company.

Issues with Lenders

Loan providers may not look favourably on single director companies with model articles due to the risk of this matter becoming contentious and the potential for litigation to arise as a result.

A more significant issue is the lender may take a retrospective view of any loans they have granted to the company, they may look to make the director personally liable for the loan rather than the company, if it is considered the director breached their obligations and did not enter into the agreement properly.

Company sale prospects tainted

If you are ever thinking of selling the company, it may be a point of contention with a buyer due to the questionable validity of decisions, breaches of obligations and potential litigation which may arise.  This will not only cause delay and cost, it could also result in the loss of the sale, or a diminished sale price.

Solution

The procedure that needs to be followed to execute the solution is quite fiddly however we can deal with all of the paperwork required to resolve the issue.

The solution includes either:

• The appointment of a second director so that the requirements under the articles are satisfied; or
• Amending the model articles to include a bespoke provision dealing specifically with the rights of a sole director.

Without ratification, the above solutions do not protect you from validity queries for past decisions. Fortunately, our procedure includes the steps that need to be taken to deal with this.

Amending the model articles comes with its own challenges if you are trying to avoid appointing a new director or providing shares to a new individual. As stated above, the articles prevent a sole director from doing anything other than appointing a new director. The sole director therefore cannot recommend a shareholder resolution to amend the articles, which is necessary to change the articles.

Of course, bringing in a new director and shareholder will dilute the power of the sole director but we have solutions to deal with this.

Invalid Past Decisions

Amending the articles will only deal with the validity of future decisions therefore the validity of the past decisions needs to considered. 

The question regarding the validity of decisions made by the sole director prior to the amendment of the model articles is further complicated by the most recent judgment and is influenced by the status quo of directors for the individual company.

The sole director will not be able to validate the past decisions themselves neither can anyone connected with that director including close relations, connected companies and firms, connected trustees and partners.

Fortunately, we can assist with the procedure required to enable you to deal with the validation of past and future decisions for you as a sole director.

As a firm, we understand corporate law can be a minefield to navigate, however our expert team will be happy to assist you. If you believe you may be affected by the model articles and are concerned about the validity of past, present or future decisions taken by a sole director, contact our new enquiries team via our website or telephone on 01634 728111.