Company & Commercial
Model Articles and a Private Limited Company with a sole director – A word of warning
The High Court recently ruled that where a company has only one director and this company has adopted the model articles of association then it will not be possible for that sole director to constitute a ‘quorum’ for decision making purposes.
All companies registered in England and Wales are required to adopt articles of association. These are the company’s constitution and set the rules for how the company operates and the decision-making requirement.
Companies can elect to have bespoke drafted articles or they can use the model articles set down by statute. Many companies, and in particular smaller companies with only one director, will choose to adopt the model articles rather than going to the expense of having bespoke articles drafted.
Article 7 of the model articles sets out that any decision of the directors must be made at a board meeting of those directors. Furthermore, article 11(2) requires two directors to be present at a meeting in order for there to be a ‘quorum’ and without a ‘quorum’ the meeting is not valid nor are those decisions made at the meeting. Article 7(2) states that a sole director is able to make decisions without regard to any provisions relating to the directors’ decision making
If the meeting is not quorate then the articles only permit directors to make a decision to appoint further directors or call a general meeting of the shareholders.
The High Court
In a recent decision of the High Court in Hashmi v Lorimer-Wing it has been suggested that the model articles are not suitable for companies with a sole director. The court ruled that without a quorum a sole director had no power to pass a board resolution and set out that article 7(2) only applies where there is no other provision requiring more than one director. As the company in Hashmi v Lorimer-Wing had adopted model articles article 7(2) was to be disapplied.
James Bowles a Solicitor in the Corporate and Commercial team, said:
“Up until this recent decision it was a generally accepted principle that a company with only one director using the model articles could rely on 7(2) in order to make decisions without a quorum. However, this recent decision indicates that the model articles as they currently stand are not appropriate for use by companies with only one director and in order to operate with only one director, a company would require amended articles.
“Where a company is already incorporated and only has one director it should either appoint an additional director or amend its articles so that 11(2) is disapplied and state that a sole director may constitute a quorum. If you proceed with either of these routes it will be important to pass a resolution to ratify all previous decisions taken by the sole director.”