Model Articles deemed unsuitable for sole director companies

A recent decision of the High Court in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has suggested that the model articles for private companies are not suitable for companies with a sole director appointed.

Update (October 2022): A subsequent case (Re Active Wear Limited) has cast doubt over the judgement in, and effects of, the case discussed in this blog, and the analysis set out below has been superseded.  Please refer to our subsequent blog in relation to the Re Active Wear Limited judgment here.

Background

The case involved whether a company had the ability to bring a claim when it had only one director appointed. The company had adopted articles of association based on the model articles for private companies (the Model Articles) with some bespoke provisions.

Article 7 of the Model Articles, which was incorporated into the company's articles, states:

(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.

Article 11(2) of the Model Articles, which was incorporated into the company's articles (subject to the bespoke Article 16), states:

(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.

The company's articles also included a bespoke Article 16, which stated that the quorum for meetings of the board was two directors.
The Deputy Judge hearing the case held 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". On that basis, the requirement of Model Article 7(2)(b) was not met, and therefore Model Article 7(2) did not operate in the circumstances. While the case was specifically concerned about the application of the bespoke Article 16, it applies similarly to Model Article 11(2), on the basis that both articles impose a quorum requirement of two.

Analysis

The two main conclusions from this case are:

• The Model Articles are not suitable for adoption (without amendment) by private companies with a sole director.
• Any decisions taken by the sole director of a private company with the Model Articles adopted (without amendments) will prima facie be ultra vires (other than decisions taken in accordance with Model Article 11(3), which operates where the total number of directors of a company is less than the quorum required and allows such directors to hold a board meeting to appoint further directors).

Some of the initial commentary about this judgment has expressed surprise, given that many held the view (as was put forward by counsel in this case) that Model Article 11(2) does not require a minimum number of directors and therefore, where a company has a sole director, Model Article 7(2) becomes operative and supersedes any other provisions of the Model Articles relating to directors’ decision-making, including Model Article 11(2). This view was supported by the Department of Business, Industry and Skills' non-statutory guidance in respect of the Model Articles, which stated that Model Articles do not provide for minimum number of directors. However, this view was rejected by the Deputy Judge hearing the case.

Practical observations

• Where a private company with a sole director has the Model Articles adopted (without amendments), that company should consider:
  • amending its articles to allow the sole director to make valid decisions; and 
  • given that any amendment of the articles will not have retrospective effect, passing a shareholder resolution to ratify any actions purported to have been taken by such sole director.
• On the incorporation of a private company, the Model Articles should not be adopted without amendment where such company will only have a single director appointed.
• Due diligence undertaken as part of a transaction or financing should include reviewing whether any entity which forms part of the subject matter of such transaction or financing has ever been a sole director company with the Model Articles adopted (without amendments), in which case a shareholder resolution to ratify any actions purported to have been taken by such sole director should be considered.