Sole Directors & Model Articles – Are Decisions Legally Binding?
Many sole directors have adopted the Model Articles when putting articles of association in place for their company. However, the legality of decision-making by sole directors using these has recently been called into question following multiple High Court Cases. As a result, sole directors must take several actions to remain compliant and protect their business.
All companies are required to have articles of association in place. These articles determine how a company can operate and set out the powers of the company itself and those involved in decision-making such as directors and shareholders. Under the Companies Act 2006, the Model Articles are the default rulebook for any company that does not adopt its own bespoke articles. As you may expect, the model articles are therefore the most common form of articles for companies in the UK.
As they are so widely adopted, it is widely accepted that the Model Articles would be free of inconsistencies and would be suitable for use by sole directors. However, this is not necessarily the case.
The issue with Model Articles for sole directors
The effects of Model Articles 7 and 11 impact how directors can make decisions relating to a company. However, there is a contradiction in these effects which can pose a problem for sole directors.
Model Article 11(2) requires a company to have two directors present at a meeting for it to be held as a ‘quorate’. This means that, if fewer than two are present, any decisions made at that meeting are invalid. However, Model Article 7(2) states:
“if –
- the company only has one director and
- no provision of the articles requires it to have more than one director.
the sole director may take decisions without regard to any of the provisions of the articles to directors’ decision-making.”
Model Article 11(2) could potentially be considered a provision requiring the company to have more than one director which would be in contravention to (b) above and as such a sole director would not be able to act.
It has generally been understood by legal practitioners that, despite the slight contradiction above, sole directors are safe to make decisions under the model articles. This is because the inclusion of Article 7(2) was clearly intended to allow for a sole director to act.
However, due to a recent High Court decision, this position is no longer clear and sole directors need to understand the current case law position to ensure the best course of action for their company..
High Court Decision
In Hashmi v Lorimer-Wing, the High Court ruled amongst other unrelated points on the issue of sole directors and Model Articles. In this case. the company involved had bespoke articles which were a combination of the Model Articles and bespoke articles. The High Court found that a sole director was unable to act due to a bespoke clause in the articles that provided similar requirements to that of Model Article 11(2). As this ruling relates to bespoke articles it is not directly applicable to the Model Articles, however, it provided an indication of how a court may rule on this issue and created uncertainty for sole directors as a result.
Following this ruling, the High Court has ruled on the case of Active Wear Ltd, Re [2022]. In this case, the court held that Model Article 7(2) (Sole Director Authority) specifically disapplies Model Article 11(2) (Quorum required for director’s meetings) and that no other articles in the Model Articles require more than one director.
Despite this ruling, the court expressed a non-binding opinion that if there had been more than one director at any point and the company returned to a sole directorship then Model Article 11(2) would apply and the sole director’s power would be restricted to appointing a sole director.
What happens next for sole directors?
Following this decision, it is not known whether the decisions above will be upheld by a future court decision or whether the government may step in to amend and clarify the Model Articles. Until such time, if you are a sole director, the following measures should be taken to ensure that you remain compliant:
- For a newly established company – ensure that you have either adopted bespoke articles or that the Model Articles have been amended to the extent that the sole director’s authority is clarified.
- For existing companies – Depending on your companies’ directorship history you may need to appoint a second director or amend your Model Articles.
If you are a sole director and unsure what to do next or wish to have your company’s Articles of Association reviewed, you should speak to a qualified solicitor. The experienced corporate and commercial team at GA Solicitors in Plymouth can assist with all matters related to sole directors, Articles and decision-making.
For a clear and no-obligation discussion, please call the corporate and commercial team today on 01752 203500. You can also email me directly jack.ross@GAsolicitors.com.
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