Articles of Association – Can companies with one director and model articles make valid decisions?
Fore Fitness Investments Holdings Ltd, Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch)
Introduction:
In a recent case, the High Court has found that a sole director was not authorised to act on behalf of a company, due to contradictory provisions in the company's articles of association based on the model articles.
Facts of the case:
A shareholder in the company, "H", presented an unfair prejudice petition. This is a procedure open to shareholders where the company's affairs are being conducted in a way which is prejudicial to them and allows them to seek relief from the Court.
The company served a defence and filed a counterclaim. However, when the company filed a counterclaim, the company was operating with only one director.
H made an application for the company's counterclaim to be struck out, on the basis that the company's articles required a minimum of two directors and therefore, the director did not have the power to direct the company to file the counterclaim.
Background:
The dispute concerned the interpretation of model articles and bespoke articles and specifically the relationship between the following provisions:
Model article 7 – Sets out the general rule that directors' decisions must be either a majority decision at a meeting, or a decision taken in accordance with Article 8. However, Article 7 also states, if a company only has one director and no provision of the articles requires it to have more than one director, the general rule does not apply. The director may take decisions without regard to any of the provisions of the articles relating to directors' decision-making.
Model article 11(2) – Allows directors to determine the quorum of directors' meetings, provided that it must never be less than two.
Bespoke article 16 – This Article was bespoke to the company in question, but provided that two specific directors must be present to ensure a meeting is quorate
Judgment:
The Court concluded that a provision in the articles requiring a quorum of at least two directors "logically is a requirement that the company must have two directors in order to manage its affairs".
Article 7(2) was clear that it only allowed a sole director to take decisions where there was no provision in the articles requiring the company to have more than one director.
However, both Articles 11(2) and bespoke Article 16 required there to be at least two directors making decisions at meetings.
This meant that, at the time of serving the counterclaim, the company did not have the power to issue the counterclaim against H on behalf of the company, as there was only one director, and the counterclaim was therefore struck out.
Implications:
The outcome of this case has come a surprise to many corporate lawyers, particularly as it suggests that model articles for private companies, which are automatically incorporated into the constitution of such companies to the extent they are not excluded or modified, must be amended if the company is to be a sole director company.
It is hoped that the government will amend the model articles for limited companies to clarify the position for companies registered in future.
In the meantime, however, existing private companies with model articles may wish to
amend them, for example to clarify that article 11(2) is not a provision requiring the company to have more than one director within the meaning of article 7(2)(a).
Companies which have, or have previously had, a single director may also wish to take advice on the validity of any decisions taken by sole directors in the past, as this case suggest there could be grounds for challenging those decisions.
If you are, or have previously been a sole director company, please contact us on 01603 693500 , e-mail us at enquiries@clapham-collinge.co.uk or by using the 'Make an Enquiry' form on our website for advice on your company's articles and the effect that this Court ruling may have on decisions made by your company.
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