What are the details?
“Model” articles of association are the standard default articles generally used by most companies including where there is a sole director. They include two somewhat contradictory articles, article 7(2) and article 11(2), regarding the Director’s ability to make decisions.
Article 7(2) states a sole director is able to make decisions but is then contradicted by article 11(2) that states a quorum of directors is required for decisions and this quorum must never be less than two directors. Although this has been unclear and subject to interpretation it has been the generally accepted view by many, including corporate solicitors that article 7(2) should prevail over article 11(2) and that a sole director could form a quorum.
However, in the recent case of Hashmi v Lorimer-Wing the judge said amendment is required for the model articles to permit for a single director to run a company and that amendment would need to include deleting article 11(2).
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 but this is not certain to happen and action should be considered.
What are the potential risks?
There is a risk that any decisions which are, or have been, made as a sole director are open to challenge as they may not be valid. It is also possible where commercial lending is in place or being sought, that lenders dealing with companies with sole directors are likely to now require an amendment to the company’s articles.
Our Brighter Thinking view:
Companies incorporated with a sole director which have adopted model articles who wish to have full power and authority, and avoid any decision being called into question, should consider amending the model articles disapplying the quorum requirement in article 11(2) for so long as they have a sole director.
Please note, this is not mandatory at this stage but where a company has adopted model articles or amended model articles with article 7(2) and article 11(2) remaining in the articles, it is advisable to consider that it should:
- Appoint an additional director;
- Ratify the decisions taken by the sole director, which may be deemed beyond their legal powers; and
- Amend its articles to contain express wording so that Article 11(2) is disapplied where there is only one director and specifically state that a sole director may constitute a quorum (at which point the additional director could resign).
How can we help?
Our Company Secretarial Team can update everything for you and the work involved in amending the articles and the paperwork required would be as follows:
- Written resolution being a special resolution requiring 75% of the shareholders votes
- Amended model articles
- Filing of the resolution and articles with Companies House
If you would like to discuss amending and updating your articles, or are unsure of whether this affects you, please get in touch with Anna-Lisa Brandini or your Menzies Relationship Team.