Are the Model Articles suitable for companies with a sole director?

Answer

No, not without amendment, after the recent High Court decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch).

Background

The model articles (the “Model Articles”) for private companies limited by shares are the default set of articles of association. They regulate the directors’ and shareholders’ powers and responsibilities and govern the administration of companies’ decision-making processes. The Model Articles are automatically adopted on incorporation, unless a company chooses to modify or exclude the model articles or adopt entirely bespoke articles.

In Hashmi, the High Court considered the interplay between Model Article 7 (Directors to take decisions collectively) and Model Article 11 (Quorum for directors’ meetings), and a bespoke article.

Model Article 7

Covers decision-making of directors and sets out the general rule that any decision of the directors must be either a majority decision at a meeting or unanimous, unless a company has a sole director and no other provision in the articles requires it to have more than one director, in which case the general rule does not apply, and decisions may be taken without regard to any of the provisions of the articles relating to directors’ decision-making.

Model Article 11  

States that, at a directors’ meeting, no proposal may be voted on unless the meeting is quorate (other than a proposal to call a new meeting). The quorum for a meeting must never be less than two, unless otherwise fixed. And if the total number of directors is less than the quorum, the directors must not take any decision, other than a decision to appoint further directors or to call a general meeting to permit the shareholders to appoint further directors.

The case itself

The dispute arose over whether Mr Lorimer-Wing, a sole director, was authorised to bring a counterclaim on behalf of Fore Fitness Investments Holdings Limited (the “Company”) in response to a claim for unfair prejudice by Mr Hashmi, a former employee, director, and shareholder of the Company.

Mr Hashmi sought to strike-out the Company’s counterclaim on the basis that the Company articles required there to be two directors for the Company to validly resolve to bring the counterclaim. The articles incorporated the Model Articles and included a bespoke article on quorum.

Mr Lorimer-Wing disputed this on the basis that Model Article 11 does not set a minimum number of directors. The Companies Act 2006 states companies may have one director, as does The Department of Business, Industry and Skills’ non-statutory guidance on the Model Articles. Mr Lorimer-Wing argued that Model Article 11 simply addresses circumstances where there are multiple directors. Model Article 7, therefore, permitted Article 11 to be ignored and for a sole director to make decisions. By extension, Mr Lorimer-Wing argued that Model Article 7 also overrode the bespoke article on quorum.

Decision

The High Court struck out the Company’s counterclaim on the basis that Mr Lorimer-Wing did not have authority under the Company’s articles. Although Model Article 7 clearly permits a sole director, the requirement in Model Article 11 and the bespoke article for two directors to constitute a quorate board necessarily meant that two directors were required to make decisions. Therefore, a sole director could not have validly resolved to bring the counterclaim.

Why does this matter?

Many companies across a range of industries are incorporated with, or subsequently adopt, the Model Articles (sometimes, with amendments). In addition, a good number of those companies have only one director. Often, this is because it is convenient or cost effective. For example, it can be administratively helpful for subsidiaries in a group to have the same director and articles of association.

Practical points to consider

To ensure that such companies can validly transact – whether with third parties or members of the same group or its shareholders – they should consider:

• Appointing at least two directors.
• Adopting or amending the articles to allow a sole director to make valid decisions.

In relation to decisions purportedly made by sole directors of such companies, they should consider ratifying the same.

Contact us

Should you have any questions, please contact one or more of the authors, or your usual Memery Crystal contact.