The Articles of Association are the key constitutional documents of a Company. The Articles set out the rules of how a Company should operate and dictates how a Company may make board or shareholder decisions. Upon incorporation, a Company may choose to adopt Model Articles. Model Articles are prescribed by the Companies Act 2006 and are a default constitutional provision. Alternatively, upon incorporation, a Company may choose to adopt bespoke Articles of Association which are specific to the Company’s particular needs.
Although Model Articles incapsulate the provisions of the Company’s Act 2006, bespoke Articles are often more beneficial for the long-term independent management and direction of the company.
More often than not, Companies upon incorporation adopt the Model Articles simply by default. However, adopting Model Articles may be problematic if a Company only has a Sole Director. This is because Article 11, as stated below, specifies that the quorum for a directors’ meeting must never be less than two people and if the quorum is less than two, the directors must not make any decision, other than a decision to appoint additional directors.
11. Quorum for directors’ meetings
11.1 At a directors’ meeting, unless a quorum is participating, no proposal is to voted on, except a proposal to call another meeting.
11.2 The quorum for directors’ meeting 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.
11.3 If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision –
- To appoint further directors, or
- To call a general meeting so as to enable the shareholders to appoint further directors.
The case of Hashmi v Lorimer-Wing [2022] considered the question of whether a private Company with a Sole Director, which adopted the Model Articles upon incorporation, can lawfully make board decisions with just a Sole Director.
This case highlighted the inconsistency of Article 7 and Article 11. This is because Article 7 states the following:
Article 7. Directors to take decisions collectively
7.1 The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
7.2 If—
- the 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, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
Prior to this case, the general consensus was that Article 7 overrode Article 11. However, since the judgement of Hashmi v Lorimer-Wing [2022], Article 7(2) does not overrule Article 11(2) and thus, there must be two directors to have the authority to manage the Company.
This obligation for a Company to have two directors in order to form a quorum at a board meeting is restrictive on any proposed resolution a Company may wish to pass. Instead of a Company having to appoint a second director, a Company may amend its Model Articles so that a Sole Director may form a quorum and therefore, may pass a proposed resolution. This can only be done by passing a Special Resolution.
A Special Resolution is a resolution which requires the approval of 75% of the Shareholders of a Company. Within the Special Resolution, it should set out what proposal is being requested of the Shareholders to consider and ultimately pass the resolution. In this instance, it would need to state that the Model Articles may be amended so that if the Company only has a Sole Director, the quorum of a meeting need only be one director. The Shareholders would need to sign this resolution to agree to that effect. Upon the passing of a Special Resolution, the Sole Director may make decisions in their own capacity on behalf of the Company. This resolution is required to be uploaded to Companies House along with the amended model articles which includes an additional sub-clause to Article 11, as stated above.
Should you require advice or assistance in relation to the issues discussed above, or require bespoke Articles of Association to be drafted, please contact Cosima Berger or Mark Deans. Additionally, please contact us below for any other Corporate / Commercial matters.
