In this article Richard Gray of Elysium Law considers amendments to the Model Articles adopted by a company with a sole Director.
Elysium Law were approached recently concerning the amendment to the Model Articles adopted by a Company who only had a sole Director.
The Company had secured the offer of a mortgage, but the lender required an amendment to the articles in that the acceptance of the mortgage offer and a charge over the property could be accepted by the Sole Director.
In pursuance of that requirement, we advised upon and amended the articles in the modified form as well as drafting the Special Resolution required.
The decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has called into question whether the articles of companies which adopt or automatically incorporate the model articles for private companies must be amended if the company is to be a sole director company. The High Court considered, among other things, the proper interpretation of Model Articles 7 and 11 and held that the provisions in Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors.
Article 7
“7.—(1) 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.
(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.
Article 11
11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
(2) 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.
(3) 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.”
Article 11, more or less replicates regulation 89, and anticipates that there must be at least two directors to form a quorum. A company as a matter of law however must have only one director.
Where only one director holds office, article 7(2) disapplies any provisions of a company’s articles relating to decision making by directors, provided the articles do not specify that at least two (or more) directors are to hold office at all times. If the articles do specify such a minimum number of directors, a sole director may only take decisions for the purposes of appointing further directors (article 17(1)(b)) or calling a general meeting to allow the shareholders to appoint further directors (article 17(1)(a)).
In Hashmi (above) the Court held that Model Article 7(2) was clear; it permitted a sole director to manage the company, where no provision of the articles required it to have more than one director. In this case, bespoke article 16.1 of the company’s articles replaced Model Article 11(2)) and required there to be multiple directors for board meetings to be quorate which the court considered also to mean that the articles required it to have more than one director. That being the case, Model Article 7(2)(a) was disapplied.
This decision indicates that it would be wise for existing private companies with model articles or articles based upon them may wish to amend them, by for example amending Model Article 11(2) by not requiring the company to have more than one director within the meaning of article 7(2)(a).
It seems that the validity of acts taken by sole directors in companies with articles based on the model articles is now likely to be called into question.
As a consequence, companies which have, or have had, a single director may also wish to consider whether, where appropriate, they should ratify some or all of the previous decisions of those directors. Note that amendments of articles will only take effect from the date of amendment, and not all companies are likely to ratify all past decisions of their sole directors.
Clearly when forming a new company bespoke articles should be filed rather than model articles. The suggestion must be that the provision of Article 11 is changed to accommodate the sole director position. A suggestion has also been made that Article 15; the recording of decisions should also be reviewed to accommodate the position.
Call us on 0151 328 1968 or email clerks@elysium-law.com for an initial discussion with one of our team.
