Commercial Update 68: Warning on Articles for Sole Director Companies

This week, some context on a couple of recent cases regarding the articles of association (Articles) of a company.

The case in question was Re Fore Fitness Investments Holdings Ltd.

It concerned an unfair prejudice petition by a shareholder of a company and more particularly whether the company had validly served notice of a counterclaim against the shareholder.

As you may know, a company’s constitution can be based as a starting point on the model articles for private companies limited by shares, which can then be modified.

The 4 articles dealt with in this case were:

  1. Model Article 7(1) – Directors are to take decisions either in a board meeting or via written resolution.
  2. Model Article 7(2) – While a company has only one director and its articles do not require it to have more than one, the general rule does not apply. The sole director can make decisions regarding running the company.
  3. Model Article 11(2) – The quorum for directors’ meetings can be fixed from time to time, but it cannot be less than two, and the default quorum is two.
  4. Model Article 11(3) – If at any time the total number of directors is less than the quorum, the directors must not take any decision other than: (i) to appoint further directors; or (ii) to convene a general meeting to enable the shareholders to appoint further directors.

You’ll note from the above that Articles 11(2) and 11(3) appear to contradict Article 7(2).

However, the approach taken has been that Article 11(2) and 11(3) form part of the rule set out in 7(1). This meant that while a company has a single director, they do not apply as Article 7(2) allows the sole director to take all decisions. The understanding was that then Article 11(2) only applied where the company has multiple directors and needs to hold a board meeting plus Article 11(3) only applied if the company does not have enough directors to form a quorum for that meeting.

This traditional viewpoint set out above was challenged in this case on the basis that Article 11(2)) did require the company to have at least two directors.

This was relevant as when the counterclaim was served, however, the company had only one director.

The High Court held that a company which adopted the Model Articles with slight modifications was unable to properly conduct business, having only one director and that the counterclaim was void. It was noted that the articles required there to be at least two directors to constitute a quorum and logically this had to be a requirement that the company in question have two directors in order to manage its affairs.

While the Companies Act section 154 of the Act permits companies to have a single director, the court held that, although this section clearly allows companies with only one director, the Model Articles cannot be used in unmodified form in these circumstances.

The second case was Hashmi v Lorimer-Wing, where more briefly, the court looked at a bespoke Article for a company, which provided that the company in question must have a minimum of two directors for a quorate meeting.

On challenge, the court decided that it followed logically that the company was required to have a minimum of two directors and that the sole director of the company at that time did not have authority to act.

So where does that leave companies that want the flexibility of being able to run with one director?

These entities should start by reviewing their Articles to identify whether they have adopted Model Articles 7 and 11 without modification.

If so, they should consider putting forward amendments to the Articles to resolve this contradiction. Please note that the Companies Act specifically permits a company to modify the Model Articles, and modified they must be to operate with a single director.

NB: If a company has historically operated with only one director, it should consider obtaining advice on whether any historic decisions taken by the sole director are or may be void.

Regards to all,