26th Jul 2022

99 Problems but Quorum Ain’t One

My little blog this time around is about something which, at first glance, is a fairly obscure legal point, but does potentially have serious ramifications for a significant proportion of business owners; sole director companies that have in place the Model Articles.

That is companies that only have one director, and that have not put in place bespoke or altered articles of association.

Firstly, a brief note on articles of association. These are essentially the company rulebook and govern various aspects of the operation of a company. All companies have articles of association, which can either be entirely bespoke, slightly amended, or if a company is incorporated without bespoke or amended articles, they will, by default, have the Model Articles.

In my experience, smaller companies with fewer directors are significantly more likely to have the Model Articles in place, and the most likely to have the Model Articles are sole director companies.

One of the areas governed by the articles of association of a company is directors’ meetings, or board meetings. There are certain decisions which must be made by the directors, either at a board meeting, or by a written directors’ resolution. We are only looking at board minutes for the purposes of this article, but it is also highly relevant for written board resolutions.

In order for a board meeting to be validly held, amongst other things, a quorum must be present. A quorum essentially means the number of eligible directors required to be in attendance at a board meeting in order for meeting to be validly held, and for the decisions made at that meeting to be properly taken.

The Model Articles provide:

Quorum for directors’ meetings

11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(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.

(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—

(a) to appoint further directors, or

(b) to call a general meeting so as to enable the shareholders to appoint further directors.

Which immediately looks to present a problem for sole director companies, as they will never have the two directors required to form a quorum, and so cannot take any decisions apart from one to appoint further directors, or to call a general meeting to allow the shareholders to do so.

However, the Model Articles also provide:

Directors to take decisions collectively

7.—(2) If—

(a) the company only has one director, and

(b) 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.

The general consensus of corporate lawyers (including the author), and the guidance issued by the Department of Business, Industry and Skills at the time the Model Articles were first conceived, was that the Model Articles, and specifically article 11(2), do not expressly require a company to have more than one director, and so therefore article 7(2) permits a sole director to “take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”, which includes article 11.

So far so boring.

However, the recent caser of Hashmi v Lorimer-Wing[1]has cast doubt on this position. To avoid people nodding off, I won’t go into the messy details of the case, which is basically a shareholder dispute. The important points to note are this:

  • The company in question had bespoke articles, based on the Model Articles, with an important addition at article 16, which essentially restated article 11(2) of the Model Articles, with minor amendments.
  • There were two directors for a time, but following a dispute, one director was removed, leaving the company with one director.
  • The former director brought a claim against the company, with the company then bringing a counterclaim against the former director. Handbags at dawn. Lawyers getting rich.
  • The former director then sought to strike out (dismiss/get rid of) this counterclaim, asserting that the articles required there to be a minimum of two directors, failing which the sole director could not do anything barring appointing a further director. This of course includes directing the company to bring a counterclaim.
  • The court agreed with this assertion, and went further than this, to say as an aside[2] that even if the company had just Model Articles, he could not see how this would have been decided differently, and that a provision in the articles stating that the quorum must never be less than two directors does operate to require a company to have more than one director.

As mentioned at the outset, this has significant implications for any company with one director and the Model Articles, as arguably all decisions made to date, and all decisions going forwards, are outside of the power of the sole director[3].

“So, what on earth do I do, Olly?” I hear you cry…

Well, you give me a call, or send me an email, and we can talk through some fairly straightforward steps.

In order to solve this issue, a special resolution of the shareholders will need to be passed to amend the articles to provide that a sole director can carry on the business of the company.

This change to the articles is not retrospective i.e., it will only apply to anything carried out after it is passed, and so I would also recommend that, at the same time, a further resolution of the members is passed ratifying everything undertaken by the sole director prior to the date on which the new articles are adopted.

There are whisperings that the government may well step in to solve this issue by amending the Model Articles, but they appear to have bigger fish to fry as it stands (TTFN, BoJo), and again, this would only solve the issue going forwards, and would not ratify actions undertaken by the sole director in the past.

For such a potentially significant issue, with such a simple solution, you would be stultum[4] not to do something about it.

Oliver is a Lawyer and Associate Director in Berwins’ Commercial team. If you need help on any of the above, give him a call on 0330 0168 613.

[1][2022] EWHC 191 (Ch), as if you’re going to look it up…

[2]Obiter dictum. Fancy bit of Latin for you. Essentially “something said in passing”.

[3]Ultra vires. Yet more fancy Latin, meaning “beyond the powers”.

[4] Final bit of Latin: “foolish”

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