Companies who operate under a sole director and who have adopted model articles had nothing to worry about. This was until the recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch). The High Court made the decision that model articles are not suitable for private companies with a sole director appointed.
Whether you are a sole director of a company who has already adopted model articles. Or considering setting up a limited company with a sole director. Keep reading as we explain what the solutions are.
The Model Articles
Like the Articles of Association, the Model Articles are a set of rules determining how the business is run day by day. The problem with the model articles is that they are a one-size-fits-all. This may work for some companies, but not for others.
However, the majority of companies opt for the model articles because they are convenient and suit many scenarios. Companies can also amend the model articles to fit their needs. Or have bespoke articles tailored specifically for the company.
The recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), however, questions the authority of a sole director in a company that has adopted Model Articles. In particular Model articles 7 and 11.
Here is a quick overview:
Model Article 7
- 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.
- If (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director. Then 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.
Model Article 11
- At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on. Except a proposal to call another meeting.
- 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.
- If the total number of directors for the time being is less than the quorum required. The directors must not take any decision other than a decision:
- (a) to appoint further directors, or
- (b) to call a general meeting so as to enable the shareholders to appoint further directors.
The company within the case had a bespoke article 16. They argued that Model Article 7 should overrule Model Article 11 in cases when the company had only one director, and one director is needed, in order to reach a quorum for a meeting.
However, the High Court didn’t agree with this. What they agreed on is that when Model Article 11 requires for a quorum of 2 directors a company must have more than one director. They ruled that Model 7 cannot overrule other decision-making procedures.
What steps should you take next as a Sole Director?
Ultimately, this means that if you are a sole director of a company you must either:
- amend the Model Articles; or
- appoint a second director to ensure you meet the quorum as per Model Article 11. Model Article 17 allows shareholders to do that by passing an ordinary resolution.
In addition, to avoid further breaches the company must ratify whatever decisions they have made in the past.
Final thoughts
This is a very complicated scenario. So if you are a sole director of a private company that has adopted Model Articles. Or are a shareholder of one, you have to be very cautious.
There are other reasons why you shouldn’t adopt model articles even if your company has more than one director. Read our blog on this very subject.
Whilst it is relatively easy to set up a limited company yourself. It’s always wise to get some advice from your lawyer or accountant in advance. So you don’t unknowingly make any mistakes.