In February, a significant decision was made by the High Court which affects private companies with only one director. The High Court held that a company which had adopted the Model Articles with slight modifications was unable to operate its business properly with only one director.
The Model Articles
The Court considered the following Articles in the case:
- Model Article 7(1): Directors are to take decisions either in a board meeting or by indicating to each other that they share a common view on a matter (in accordance with Article 8). This is referred to as the “general rule”.
- Model Article 7(2): If a company has only one director and there is no provision in its articles for it to have more than one, the general rule does not apply. Under these circumstances, the sole director “may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”.
- Model Article 11(2): The quorum for directors’ meetings may be fixed from time to time, but it may never be less than two. Unless otherwise fixed, it is two.
- Model Article 11(3): If at any moment the total number of directors is less than the quorum, the directors must not take any decision other than: (a) to appoint further directors; or (b) to call a general meeting to enable the shareholders to appoint further directors.
Hashmi v Lorimer-Wing  EWHC 191
At first glance it appears that Model Articles 7(2), 11(2) and 11(3) contradict each other. To date, the general approach has been taken that when a company only has one director, Articles 11(2) and 11(3) do not apply, as Article 7(2) allows the sole director to make all decisions.
The Court considered the interaction between the above Model Articles and the company’s bespoke amendments and concluded that Article 11(2) does in fact require a company to have at least have two directors. The quorum requirement for two directors prevented the sole director in the case from acting on behalf of the company. The counterclaim that the company had purportedly launched was therefore held to be invalid and the Court struck it out. Judge Farnhill held:
“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.”
Why this matters
Clearly this has significant ramifications for companies with Model Articles as the validity of acts taken by a sole director may now be called into question.
If you are a sole director and think this may be an issue for you, please get in touch with the Corporate and Commercial team who can review your Articles and advise on next steps to ensure that your decisions, past and present, are valid.
For more information and to find out how we can help you, please contact us on 0345 646 0406 or fill in our online enquiry form and a member of the team will be in touch.