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Sole Directors and decision making: Key Considerations for Limited Company Owners

If you are the sole director of a limited company, this article is essential reading. Many companies formed after 2006 adopted the Model Articles for ease.

If you are the sole director of a limited company, this article is essential reading. Many companies formed after 2006 adopted the Model Articles for ease.

These are a standard set of articles which apply as your constitutional document if you do not want a bespoke set specifically prepared for your company.

Many such companies are also set up and run by a single director. However, recent Court cases cast doubt on whether or not the Model Articles actually allow this.

Articles of a Company set out governance matters, such as:

  • Quorum for a directors meeting
  • Votes for decision making; and
  • Other matters

Model Article 11(2) says that 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.

Model Article 7 says that any decision of the directors must be either a majority decision at a meeting, or a unanimous decision (taken in accordance with Model Article 8).

Model Article 7 then goes on to provide that if:

  1. The company only has one director; and
  2. No provision of the articles requires it to have one than one director

Then certain formalities which would otherwise apply to making director decisions do not apply.

When the 2006 Act and the Model Articles came into effect there had at the time been questions raised about the interaction of Articles 7(2) and 11(2).

The general consensus then (backed by guidance from the then Department of Business Industry & Skills) was that Article 11(2) did not impose a requirement for a minimum number of directors. It simply stated that the quorum for board meetings was two, with Model Article 7(2) confirming that when the company only had one director, the sole director could take decisions without regard to the director decision-making articles (including Model 11(2)). Therefore, a company with one director was always able to act and able to make all decisions.

The case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) suggested that as Model Article 11(2) requires a company to have a minimum of two directors for a quorate meeting then Model Article 7(2) cannot apply and a sole director does not have authority to act.  This therefore gave rise to a requirement that the Model Articles (which are automatically incorporated into the constitution of a private company to the extent not excluded or modified) would always have to be amended if the company is to be a sole director company.

In Re Active Wear Ltd [2022] EWHC 2340 (Ch) the interpretation of articles 7 and 11 was re-considered.  In this case it was found that the quorum provisions in Model Article 11(2) did not in fact impose a requirement on a company to have a minimum of 2 directors.

There are distinctions between the two cases most notably that in Re Active Wear the Model Articles were adopted without amendment and the company only ever had a sole director.

However, the decision in Re Active Wear is not definitive leaving it more than likely that the issue of the validity of acts taken by a sole director in a company with articles based on the Model Articles will be called into question again.

Therefore, for the time being, any matters where there is

  • A sole director, and
  • Article 11(2) in situ

Will be open to challenge calling into question the validity of all decisions made by such  sole director.

If you are a sole director company with Model Article 11(2) or a similar provision setting a quorum at 2 you may need to consider:

  • Appointing a second director (Model Article 11(3) restricts actions of a sole director if a quorum of 2 is required other than appointing further directors);
  • Amending your articles; and
  • Ratifying past actions.

If you want more information as to how this may effect you and your company please contact, Margaret Evans or one our expert corporate lawyers.

This article first appeared on https://www.wardhadaway.com/insights/updates/sole-directors-and-decision-making-key-considerations-for-limited-company-owners/

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