Model Articles and a Private Limited Company with a sole director – corporate law update

Many companies have sole directors who labour under the mistaken belief that Model Articles are all they need. Unfortunately, as has been recently confirmed by Fore Investments Holdings Ltd [2022] EWHC 191 (Ch), this isn’t the case. This claim was an unfair prejudice petition brought by a shareholder of the company. The company did bring a counterclaim, but a question surrounding its validity was made. The counterclaim was dismissed, as it was held, that the company did not comply with its articles of association when serving the counterclaim.

Fore Investments Holding Ltd argued that the model articles must allow for it to operate with a sole director due to the fact that the Companies Act 2006 and the Model Articles allows for single director companies and for sole directors to make all decisions, in single director companies (Model Article 7(2)). The Shareholder bringing the claim, advised that the Articles of Association of the company did require the company to have at least two directors to be quorate (the specific article required there to be two specific directors in order to form a quorum).  When the company served the counterclaim, the company only had one director, and the shareholder suggested that the counterclaim should be dismissed.

Despite the reference to sole directors in Model Articles, the court agreed with the shareholder that Articles of Association that require at least two directors, the company must have the requisite number of directors to manage its affairs. Whilst the court acknowledged that the Companies Act 2006 touches on companies with a sole director, standard Model Articles cannot be used for companies with one director, and therefore should modify the Model Articles required to reflect the company’s position of having only one director.

Therefore, despite the company having a bespoke Model Article 11(2), the company should have amended the Model Article to allow the company to operate with only one director. If they did, then the counterclaim may have been accepted by the court, when it was served.

The case illustrates the importance of these following Model Articles:

Model Article 7(1)  “a decision made by directors  must be made either by a majority decision at a meeting or a decision taken in accordance with Article 8” – otherwise known as the “general rule”.

Model Article 7(2) “if the company only has one director, and no provision of the articles that requires it to have more than one director, the general rule does not apply” and the sole director can make decisions on behalf of the Company.

Model Article 11(2) “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 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”

It is an industry wide approach that Model Articles 11(2) and 11(3) form part of the “general rule”, therefore whilst a company has one director only they will not apply and the company can operate with a sole director. This case goes against the general rule and makes it clear that the articles must reflect how the company operates.

If you are the only director of a company, it is therefore imperative that you ensure the Articles of Association are properly tailored to your needs. Otherwise, you run the risk of not complying with your Articles of Association when making decisions, meaning that any decision made, could be deemed void. Therefore companies should review their current Articles of Association, specifically articles 7 and 11 and see whether they have adopted Model Articles 7 and 11. The Company will then need to determine whether it will need to operate as a single director company. If so the company’s Articles of Association will need to be amended to ensure the company can operate this way. If the company did also operate historically as a single director company then it should also seek advice on whether any decision made by the sole director is void.

For further advice and assistance please contact our Business Services Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk