The High Court has recently considered the proper interpretation of the model articles for private companies in relation to the collective decision making powers of directors, finding that the quorum provisions in model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors. Consequently, a sole director was prevented from acting on behalf of the company.
The Articles of a company are the rules which set out how a company is to be managed. The Articles regulate a variety of matters including share issues and the administration of board meetings and shareholder meetings. The Articles are a contract between the company and its shareholders setting out how the company will be managed and in addition, they also create rights and obligations between the shareholders themselves.
In Hashmi v Lorimer-Wing  EWHC 191, the company’s Articles were a mix of the Model Articles and bespoke articles agreed between the parties. The Model Articles were then disapplied to the extent they conflicted with the bespoke articles. The case focused on the correct interpretation of the Articles.
Articles 7 (Directors to take decisions collectively) and 11 (Quorum for directors’ meetings) of the company’s Articles were derived from the same numbered provisions in the Model Articles, as follows:
- Article 7(2)of the Model Articles states that for so long as the company has a single director, the general rule about directors’ decision-making by majority decision at a board meeting (or by unanimous written resolution) does not apply and the sole director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making;
- Article 11(2)of the Model Articles states that, unless otherwise determined by the directors, the quorum for a directors’ meeting is two; and
- Bespoke Article 16 which expressly modified article 11(2) above by requiring a quorum for a board meeting to be “two Directors one of whom must be an Investors’ Director (if appointed) and one the Executive”.
The judge determined that because Article 16.1 specifically required the company to have a minimum of two directors for a quorate meeting, it followed logically that the company was required to have a minimum of two directors. As a result, Article 7(2) could not apply because Article 16(2) required the company to have more than one director. As a result, the High Court decided that the sole director of the company did not have authority to act.
This case has come as a surprise to corporate lawyers. Although there was some discussion in 2009 about the interaction between Model Articles 7(2) and 11(2), the general consensus and accepted practice since that time has been that Article 11(2) only relates to the quorum of board meetings and that when there is only a sole director, Model Article 7(1) does not apply and the sole director can take decisions without regard to the quorum provisions. However, in this case, it was decided that the Model Articles must be amended for a sole director to manage a company. Although the company in question did have bespoke provision in its Articles about quorum, it is understood that the Hashmi case does give an indication of how the courts will interpret the relationship between Articles 7 and 11.
It is hoped that the government will amend the Model Articles for both private companies limited by shares and private companies limited by guarantee to put the question beyond doubt for companies registered in future.
Until the issue is clarified, we recommend that companies with a sole director should review their articles and, if necessary amend them to expressly state that the minimum number of directors is one and that director has authority to bind the company. Amendments to Articles will, however, only take place prospectively so any changes will not affect actions taken by a company before the amendment(s) take effect. Therefore, following amendment, the sole director would be advised to ratify all previous actions and decisions in another director’s resolution. As an alternative, sole directors may wish to appoint an additional director (if the Articles allow) but again, historic decisions of a single director may well still need to be ratified.
For further information on the issues raised, please contact Harender Branch at: firstname.lastname@example.org