Does a sole director have authority to act?

6 April 2022

The recent High Court case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch has thrown doubt on how to interpret the Model Articles.

Articles are a set of rules which determine how a private company is run and they represent a contract not only between the company and its shareholders but also between the shareholders themselves. Examples of what is covered in a company’s Articles include the liability of shareholders, how shareholders make decisions and how directors operate. The Model Articles are a set of default standard articles which, unless modified or excluded, apply automatically to a private company incorporated on or after 1 October 2009.

The question to be determined by the High Court was whether the sole director of a company had authority to act.  The company in question had adopted the Model Articles, but with some modifications, and the relevant Articles are set out below.

DECISION-MAKING BY DIRECTORS

7.— Directors to take decisions collectively

(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.

11.— Quorum for directors' meetings

(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.

BESPOKE ARTICLE

16.1
The quorum for meetings of the Board shall be two Directors one of whom must be an Investors' Director (if appointed) and one the Executive (if appointed as Director) unless such Investors' Director or Executive is unable to attend a Board meeting and has confirmed in writing (which may be by email) that he is satisfied that the Board meeting in question is quorate without him being present.  [“Board” does not appear to have been defined anywhere but was presumably intended to mean the directors.]

The High Court determined that because Article 16.1 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.  Therefore, the sole director of the company did not have authority to act.  

Where does this leave sole directors of companies which have adopted the Model Articles either in full or modified in a similar way as above?

With a problem is the short answer.  Applying the same logic, Article 11(2) in the Model Articles must also require a minimum of two directors because that Article provides that the quorum for directors’ meetings must never be less than two. This is at odds with the general understanding to date of how the Model Articles should be interpreted. Whilst the position is not without doubt, it has been generally understood that setting out a quorum for directors’ meetings in the Articles is not the same as requiring the company to have that minimum number of directors.  In other words, Article 11(2) is not a requirement for a company to have at least two directors; it simply provides what the quorum should be if there is more than one director.  The presumption has been that the draftsperson of the Model Articles must have intended Article 7(2) to override Article 11(2) – and therefore Article 16(2) in the case before the High Court.  The Model Articles were introduced to complement the changes that were introduced by the Companies Act 2006 which included in particular that a private company could have only one director.  Any other interpretation of the interaction between Articles 7(2) and 11(2) would require Article 11(2) to be amended in every case where a sole director is appointed and this seems unlikely to have been the drafter’s intention. However, the High Court case suggests that this is exactly what the drafter intended.

What should a sole director do?

For now, given the uncertainty, the safest course is to amend Article 11(2) or its bespoke equivalent to provide clearly that the quorum for a directors’ meeting is one at any time when there is only one director (leaving aside the technical argument that there is not a meeting when only one person attends).  It might also be prudent to confirm explicitly in the Articles that that the minimum number of directors is one and that there is no maximum number. 

Alternatively, an additional director may be appointed as long as this appointment can be made by the shareholders in accordance with the Articles, given the sole director’s lack of authority to act.

This blog has been drafted and provided by Kingsley Napley LLP and should be used for informational purposes only. The information should not be relied on as an exhaustive explanation of the law or issues involved without seeking legal advice.

FURTHER INFORMATION

For further information on issues raised within this blog, please contact John Young of a member of our corporate and commercial law team

 

ABOUT THE AUTHOR

John Young is a partner in the corporate and commercial team and specialises in the business needs of entrepreneurial, high growth and family businesses, advising them throughout their lifecycle - from startup through to listing and beyond. 

 

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On April 7th 2022 Susanne Pugsley commented:

Out of interest if the company was formed before 1 October 2009 what are the rules on model articles and how do they differ?

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