Model Articles & Sole Directors - Warning?

[UK Contractor Accountant]

The High Court has recently passed judgment that a company with Model Articles and with only one director appointed would not constitute a ‘quorum’ and would therefore have to appoint another director and/or amend its Articles.

The case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch has thrown doubt on how to interpret the Model Articles. The question to be determined by the High Court was whether the sole director of a company had authority to act. The company in question had adopted the Model Articles, but with some modifications

Before this recent decision, the generally accepted consensus was that where a company with Model Articles intends to operate with only one director, Article 7(2) of the Model Articles applied, and the sole director could constitute a quorum, meaning no amendment of the Model Articles was necessary.

However, to the surprise of many corporate lawyers observing the case, the High Court’s decision here has put this accepted view in doubt. Indeed, comments of the High Court at paragraph 24 of the judgment seem to suggest that although the recent case seemed to rest on the wording of the additional Article 16 added to the Model Articles for the company in question, unamended Model Articles would also need to be adapted to permit a sole director to run a company.

 

[Elliot Green]

The High Court has recently passed judgment that a company with Model Articles and with only one director appointed would not constitute a ‘quorum’ and would therefore have to appoint another director and/or amend its Articles.

The case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch has thrown doubt on how to interpret the Model Articles. The question to be determined by the High Court was whether the sole director of a company had authority to act. The company in question had adopted the Model Articles, but with some modifications

Before this recent decision, the generally accepted consensus was that where a company with Model Articles intends to operate with only one director, Article 7(2) of the Model Articles applied, and the sole director could constitute a quorum, meaning no amendment of the Model Articles was necessary.

However, to the surprise of many corporate lawyers observing the case, the High Court’s decision here has put this accepted view in doubt. Indeed, comments of the High Court at paragraph 24 of the judgment seem to suggest that although the recent case seemed to rest on the wording of the additional Article 16 added to the Model Articles for the company in question, unamended Model Articles would also need to be adapted to permit a sole director to run a company.

I think this is a fascinating anomaly in the case of a sole Director owner-managed company. The Duomatic principle may help as long as the company was solvent at the relevant time to conceivably relieve a Director and this *may* enable them to ratify the position.

Some commentators are saying that the relevant comments are obiter and therefore not definitive.

Disclaimer: This is not legal advice and should not be relied upon as such. This is provided for information purposes only and no liability is accepted by the writer for any reliance placed upon it.

 

[UK Contractor Accountant]

This is what our Formation Agents are recommending until the Government change the Model Articles:

it is important to consider that where a company has adopted the Model Articles as its Articles of Association and has operated, or intends to operate with one director, it should:

Either:

• appoint an additional director; then
• pass a resolution to ratify previous decisions taken by the sole director which may be deemed beyond that sole director’s legal power; and
• amend its Articles so that Article 11(2) is specifically disapplied where there is only one director stating that a sole director may constitute a quorum (at which point the additional director could then step down if required).

Or a better alternative, in our opinion is:

• convene a General Meeting of the company in order to adopt a complete new set of bespoke Articles that covers this issue entirely and saves the need to make amendments to the Model Articles (which could be a more time-consuming process and still result in a sub-standard set of Articles); and then
• pass a resolution to ratify the decisions taken by the sole director which may be deemed beyond that sole director’s legal power.

 

[Elliot Green]

This is what our Formation Agents are recommending until the Government change the Model Articles:

it is important to consider that where a company has adopted the Model Articles as its Articles of Association and has operated, or intends to operate with one director, it should:

Either:

• appoint an additional director; then
• pass a resolution to ratify previous decisions taken by the sole director which may be deemed beyond that sole director’s legal power; and
• amend its Articles so that Article 11(2) is specifically disapplied where there is only one director stating that a sole director may constitute a quorum (at which point the additional director could then step down if required).

Or a better alternative, in our opinion is:

• convene a General Meeting of the company in order to adopt a complete new set of bespoke Articles that covers this issue entirely and saves the need to make amendments to the Model Articles (which could be a more time-consuming process and still result in a sub-standard set of Articles); and then
• pass a resolution to ratify the decisions taken by the sole director which may be deemed beyond that sole director’s legal power.

Companies House is going to be busy!

 

[WaveJumper]

Very interesting thread guys great info and food for thought. Out of interest is there a simple explanation as to why this case ended up in the high court before I google it

 

[WaveJumper]

Having looked at this now seems like introduction of that bespoke article 16 really put the spanner in the works, I wonder if they took any advice before doing this. Going to be interesting to see how this plays out for all those sole directors now and as mentioned CH website could become quite busy

 

[Elliot Green]

This is what our Formation Agents are recommending until the Government change the Model Articles:

it is important to consider that where a company has adopted the Model Articles as its Articles of Association and has operated, or intends to operate with one director, it should:

Either:

• appoint an additional director; then
• pass a resolution to ratify previous decisions taken by the sole director which may be deemed beyond that sole director’s legal power; and
• amend its Articles so that Article 11(2) is specifically disapplied where there is only one director stating that a sole director may constitute a quorum (at which point the additional director could then step down if required).

Or a better alternative, in our opinion is:

• convene a General Meeting of the company in order to adopt a complete new set of bespoke Articles that covers this issue entirely and saves the need to make amendments to the Model Articles (which could be a more time-consuming process and still result in a sub-standard set of Articles); and then
• pass a resolution to ratify the decisions taken by the sole director which may be deemed beyond that sole director’s legal power.

Having looked at this now seems like introduction of that bespoke article 16 really put the spanner in the works, I wonder if they took any advice before doing this. Going to be interesting to see how this plays out for all those sole directors now and as mentioned CH website could become quite busy

I am interested in who is going to challenge the acts of a sole director company?

 

[The Resolver]

Common law at its best ? Well certainly it has interpreted existing law to bring (some) clarity where those drafting had failed to so do.

This decision cries out for an appeal, not least because of its impact on other forms of automatic contracting. However, as the counter-claim was struck out because the company had not authorised it, there would seem no point in the heavy cost of an appeal as simpler to just apply the 'fix' and then issue a fresh claim.

 

[eteb3]

Why is everyone shocked? Paragraph 11 of the model arts is crystal clear, no?

(not a sarky question)

 

[The Resolver]

On its own, yes, but the issue rel;ates to 7(2) which says:-

"(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."

Art 11 does not require a company to have more than one Director but only that the qourum should be not less than 2. Since that is "a provision relating to decision-making" and which,under Art 7(2) ,can be ignored if there is only one Director.

If you enjoyed that would you like me now to explain the concept of mud?

 

[eteb3]

Thanks for making that clear!

Looks like HMG's draftsmen have a liking for obscure cross-references - the Charity Commission model constitutions I contend with are similar, so I hope they'll stand up better in court if they ever need to.

 

[The Resolver]

I agree. Whatever happened to the Plain English campaign?

A law that needs the public to pay a lawyer to explain what it means is a badly drafted law.

 

[dylanmarlais]

This is what our Formation Agents are recommending until the Government change the Model Articles:

it is important to consider that where a company has adopted the Model Articles as its Articles of Association and has operated, or intends to operate with one director, it should:

Either:

• appoint an additional director; then
• pass a resolution to ratify previous decisions taken by the sole director which may be deemed beyond that sole director’s legal power; and
• amend its Articles so that Article 11(2) is specifically disapplied where there is only one director stating that a sole director may constitute a quorum (at which point the additional director could then step down if required).

Or a better alternative, in our opinion is:

• convene a General Meeting of the company in order to adopt a complete new set of bespoke Articles that covers this issue entirely and saves the need to make amendments to the Model Articles (which could be a more time-consuming process and still result in a sub-standard set of Articles); and then
• pass a resolution to ratify the decisions taken by the sole director which may be deemed beyond that sole director’s legal power.

If the sole director is the only shareholder, that could be an issue. The Companies Act does not allow the director to exercise his votes as a shareholder to ratify his past acts. A possible solution for a soledirector/sole shareholder company would be to appoint another director and issue a share a A N Other. The board calls a general meeting and A N Other vies to ratify the last acts of the sole director.

I would add that this decision was made by a Deputy Judge of the High Court (a City solicitor who specialises in contract law) and has gone against the widely-accepted understanding that the Model Articles allows for a sole director. Indeed, the Companies Act specifically permits companies to have a single director and the Model Articles should perhaps be interpreted in light of that factual background.

If the judge’s decision correct, it has, at a strike, invalidated countless numbers of decisions by thousands of sole directors since the coming into force of the Companies Act.

I suspect that this judgment may well be reviewed or corrected by secondary legislation soon.

In addition, it may be that the decision in the case may have turned on the bespoke article 16(2) added to the Model Articles. “I agree with Mr Reed that Bespoke Article 16 requires two directors in order for there to be a quorum.“. (paragraph 19).

Therefore, it seems to be accepted that the judge’s later suggestion that the Model Articles for a single director company should be amended are obiter (not necessary for his decision) and therefore not binding.

So perhaps we shouldn’t panic yet.