Companies with Sole Directors – An Important Update on Model Articles
A recent judgement in a Court case has brought to light something that companies with sole directors may need to review.
The company in question used unamended Model Form Articles and had a sole director, as a result the Model Articles should have been amended as they stated that two directors, rather than one, were needed for a Board Meeting to be quorate and for the proceedings at that meeting to be valid. In this case it meant that any decisions made by the sole director were not binding.
What is Model Form?
Model Form Articles are in a standard format (prescribed by the Companies Act) and that Model Form will apply if the company does not choose to have a set of articles specifically prepared for it. There are a number of reasons why the Model Form Articles may not be suitable, and the recent Court case mentioned above has highlighted on such an issue - the number of directors needed to form a quorate meeting.
Can a Sole Director make all the decisions?
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 say that if (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, then certain formalities which would otherwise apply to making director decisions do not apply.
There has been some doubt about the way these two Model Articles work together – it has been thought that Model Article 7 meant that just one director (a sole director) was always able to act and able to make all decisions.
However, the judgment in the recent case was that Model Article 11(2) actually amounts to a requirement for a quorum of two directors, so two directors must be present for the meeting to be quorate. Effectively this means that a company which uses the Model Articles (unamended) must have at least two directors to manage its business and make decisions about the company.
The Court’s decision has come as a surprise to many and the Government may well now amend the Model Articles to address this issue. However, in the meantime, we recommend that companies with a single director review and amend their Articles if required and also consider whether some or all of the previous decisions of those directors should be ratified.
Review your company situation and get further support
If you would like to discuss this further, please get in touch with your usual Milsted Langdon contact, where we can advise you on the best course of action.