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The High Court has recently passed a judgement that a company with model articles and only one director would not constitute a ‘quorum’ and would therefore have to appoint another director or amend its articles, casting doubt on the generally accepted principles around the interpretation of the model articles.
Due to this decision, it will be necessary for all UK companies with model articles and only one director to take action to appoint a second director, ratify all previous decisions of the sole director and amend their articles to allow one director to constitute a quorum.
Background
All UK companies must have articles of association, which are a company’s constitution setting out how it must operate. A company can choose to have its own bespoke set of articles or use the model articles, which are the default articles created by statute.
All UK companies must have at least one director as required by the Companies Act 2006.
Article 7 of the model articles requires that any decision of the directors must be made at a meeting of directors (or unanimously).
In order for a directors meeting to be considered valid, a set number of directors must be present, referred to as a ‘quorum’. Article 11(2) of the model articles sets the quorum at two directors unless otherwise fixed.
If the total number of directors present at a meeting is less than the quorum required, the model articles only permit directors to deal with the following:
- a decision to appoint further directors; or
- to call a general meeting of the company’s shareholders to enable the shareholders to appoint further directors.
However, in the event that the company has only one director (and no provisions of the company’s articles requires it have more than one director), then article 7 (2) of the model articles provides that a sole director may take decisions without regard to any of the provisions of the articles relating to directors’ decision making.
View of the High Court
In a recent case involving a company operating with modified model articles, the company’s articles contained provisions that required two specific directors be present for a board meeting to be quorate and a further provision stating that any model articles were disapplied to the extent that they conflicted with the modified model articles.
The High Court ruled that the quorum provision required at least two directors to participate in any board decision, and as such, the company’s sole director had no power to pass a board resolution. The court stated that model article 7(2) only permits a sole director to manage a company where no other provision of the company’s articles requires it to have more than one director. In this case, as the company had model articles which required a quorum of at least two directors, this meant that article 7(2) of the model articles was disapplied.
The High Court decided that in the instances where a company intends to operate with only one director, the model articles need to be amended to permit a single director to constitute a quorum.
Comment
Before this recent decision, the generally accepted consensus was that where a company with model articles intends to operate with only one director, article 7(2) of the model articles applied, and the sole director could constitute a quorum, meaning no amendment of the model articles was necessary.
However, the High Court’s decision has put this accepted view in doubt. Whilst the government may amend the model articles in the future, for the time being, it is important to consider that where a company has adopted the model articles as its articles of association and has operated or intends to operate with one director, it should:
- appoint an additional director;
- pass a resolution to ratify the decisions taken by the sole director which may be deemed beyond that sole director’s legal power; and
- amend its articles so that article 11(2) is disapplied where there is only one director and, perhaps, specifically stating that a sole director may constitute a quorum (at which point the additional director could step down if required).
An alternative could be to hold a general meeting of the company’s shareholders to effect the same; however, this is likely to be a disproportionate exercise for most sole director companies.
Here to Help
If you would like us to undertake a review of your company’s articles of association in light of the above or generally, please contact our Corporate Team below.