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Law for Business

Knowhow - guidance - precedents

06 SEP 2012

In Practice: Model Articles - Sole Director

Introduction

The Model Articles only came into being on 1 October 2009 [The model articles of association for private companies limited by shares are found at Sch 1 to the Companies (Model Articles) Regulations 2008, SI 2008/3229] and the full extent of the changes they have brought in are still being felt. One issue that has arisen time and again concerns sole directors and their power to make decisions on behalf of the company. The issue has been raised to such a considerable extent that some will be amending bespoke articles of association to remove any possible ambiguity.
Articles of association (‘the articles') are generally considered the internal rule-book for a company. Every company must have articles and if a company does not file any on incorporation then the Model Articles that apply to that type of company will apply by default. Articles are the key part of the constitution of the company. Bespoke articles are tailored according to a company's requirements and may also include useful information for those involved in company administration such as quorum at general meetings, the voting rights of shareholders and to allow for alternate directors among numerous other provisions.
Many bespoke articles are short form articles. This means that the articles set out that the Model Articles apply (by reference) to the company in question save insofar as the Model Articles are excluded or modified by the short form articles and both documents together as amended make up the articles of the company [See further Gore-Browne on Companies, 6[10]]. While s 18 of the Companies Act 2006 provides that the articles of a company must be comprised in a single document, the practice in relation to articles pre-the Model Articles has been allowed to continue of incorporating the government's model by reference and amending or removing certain provisions as necessary. Some practitioners have referred in their bespoke articles to the Model Articles for both private and public companies. Other practitioners have preferred to produce long form articles containing all the relevant provisions in only one document.
This article focuses on private companies limited by shares, although the issue applies equally to private companies limited by guarantee. For public limited companies, the position is different as they are required to have two directors [Section 154 of the Companies Act 2006. A private company must have at least one director. See further Gore-Browne on Companies, 15[7]].
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Sole director

The issue concerns a sole director to the company and whether that sole director can take decisions in relation to the company. To many (including the writer), the position under the Model Articles seems clear. A sole director can undertake decisions in relation to a company in accordance with Model Article 7(2) [See further Gore-Browne on Companies, 6[9] and the reference to reg 64 of Table A in the comparison table]. However, not everyone agrees and there is some confusion on the point.

What is the confusion and how did it arise?

Some practitioners in this area, including solicitors, accountants and in-house counsel at financial organisations, have taken the view that the Model Articles require a minimum of two directors. This seems to be on the basis that there is a minimum of two for the quorum for meetings of directors. While they agree that under the Companies Act 2006 a private company can have one director their argument is that in order for that director to take decisions on his own the Model Articles must be amended.
Certainly, it seems that amendment to the Model Articles (or further guidance) to clear up the confusion concerning the interrelationship between Model Article 11 and Model Article 7 would be useful.
Model Article 11 provides as follows:
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.'
Model Article 7 provides:
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 by a majority decision at a meeting or a decision taken in accordance with article 8.
(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.' [Model Article 8 deals with the unanimous decisions of the directors.]
The argument put forward is that Model Article 11 sets the quorum for directors' meetings at two and that any attempt to make decisions in any other way will require the appointment of further directors or an amendment to the Model Articles.
A number of lending banks are of this view and it has almost jeopardised a few of the transactions Jordans Limited assisted with. The following comments were received:
‘Whilst section 7 does state that "if the company has only one director and no provision of the articles requires it to have more than on director etc ...", the point is that the Articles do require the company to have more than one director as the quorum for a directors' meeting is two.
As such, the Bank will require the Articles to be amended so that they state:
- the number of Directors need not exceed one; and
- a sole Director may exercise all the powers conferred by the Articles on the Directors, and for such time as there is not more than one Director of the Company, there shall be no requirement for a quorum for meetings of Directors.'
In another case there were difficulties in relation to a loan as a result of the interpretation of the Model Articles. The response from the lender's solicitors was as follows:
‘... we do not agree that it is not necessary to amend the Borrower's Articles of Association.
1. Article 11 of the Model Articles states that a quorum comprises two directors. The Articles of the Borrower states that the Model Articles shall apply except where modified, and no amendment has been made to Article 11.
2. We do not agree that Article 7(2) overrides Article 11, but in any event, Article 7(2) only applies where no provision of the articles requires it to have more than one director'. We consider that Article 11 requires the Borrower to have more than one director in order for there to be a quorum at board meetings.
3. We agree that the Borrower may have only one director if it chooses to do so, but its Articles must reflect this. In our opinion, a resolution must be passed to amend Article 11 so that the quorum is 1. In fact Mr ... (the sole director) needs to appoint a second director (which he may do under Article 11(3)) in order to have a quorate meeting so that amendment be made to Article 11. The new director can then resign after that resolution is passed if desired ...'
A further scenario relating to a floating charge:
‘... our Legal Department have spotted an error within the Articles of Association which has stopped them from issuing the Floating Charge documents as was expected on Friday ...
We note your advice that this Company has only one Director. We also note that the Company's Articles are based on the Companies (Model Articles) Regulations 2008. In Clause 11(2) of the Model Articles it states that a quorum for a Directors' Meeting may be fixed from time to time by the Directors, but it must never be less than two and unless otherwise fixed it is two. This does not appear to have been varied in the Company's Articles. If another Director is not to be appointed, then the Articles would need to be amended as follows:
- The number of Directors need not exceed one,
- A sole Director may exercise all the powers conferred by the Articles on the Directors and for such time as there is not more than one Director of the Company there shall be no requirement for a quorum or meeting of Directors. Any provisions in the Articles which conflict with these provisions should be deleted.
In short, we are unable to issue the Floating charge documents until the Articles of Association have been updated to allow the company to operate with only one Director.'

The better view?

As can be seen from the above this has had a significant impact. Jordans Limited's view is that the arguments set out above are not correct. Counsel from Erskine Chambers with whom Jordans Limited settled its bespoke articles of association is also of this view. Model Article 7(2) overrides any other part of the Model Articles and allows a sole director to take decisions. It disapplies the quorum requirement. Model Article 7(2) allows a sole director (where there are no provisions as to a minimum number requirement) to take decisions. The arguments against this seem to be broadly that the quorum requirement is such a minimum number requirement. A contrast can be made between the wording here and that under Table A, which may be helpful. [Table A as it relates to private companies limited by shares (in force immediately prior to the Model Articles regulations) as set out in the Companies (Tables A to F Regulations 1985, SI 1985/805, amended by the Companies (Tables A to F) (Amendment) Regulations 1985, SI 1985/1052, the Companies Act 1985 (Electronic Communications) Order 2000, SI 2000/3373, the Companies (Tables A to F) (Amendment) Regulations 2007, SI 2007/2541 and the Companies (Tables A to F) (Amendment) (No 2) Regulations 2007, SI 2007/2826.]

Position under Table A prior to the Model Articles

Under Table A reg 64 did expressly provide for a minimum number of directors:
‘Number of directors
64. Unless otherwise determined by ordinary resolution, the number of directors (other than alternate directors) shall not be subject to any maximum but shall be not less than two.'
This provision clearly states the requirement for the number of directors. It is used in a similar form now in bespoke articles where practitioners want to ensure a minimum of two directors (for example, with subsidiaries of PLCs this is common). In contrast, the provision of Model Article 11(2) sets out the quorum for meetings of directors.
While Table A was in force, practitioners wishing to ensure a company's sole director could make decisions were used to altering reg 64 of Table A in their articles as a matter of course. Jordans Limited's bespoke articles contained a provision along the following lines:
‘1.1 Regulation 64 shall not apply to the Company.
1.2 The maximum and minimum number respectively of the directors may be determined from time to time by ordinary resolution. Subject to and in default of any such determination there shall be no maximum number of directors and the minimum number of directors shall be one. Whenever the minimum number of directors is one, a sole director shall have authority to exercise all the powers and discretions by Table A and by these Articles expressed to be vested in the directors generally, and regulation 89 in Table A shall be modified accordingly.'
Perhaps the confusion partly arose as it used to be the case under Table A that articles always needed amending on this point?

Distinction between quorum and number of directors

Model Article 11(2) provides: ‘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.' According to Model Article 7(2) where there is a sole director then ‘... 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'. It says this applies where there is no provision of the articles requiring more than one director. The quorum provision is the number of directors required for meetings of directors to be held and not a requirement to have two directors in office unlike under Table A [See further Gore-Browne on Companies,6[9] and the reference to reg 64 of Table A in the comparison table].

Model Articles for public limited companies

[Found at Sch 3 to the Model Articles Regulations.]
These are briefly mentioned here to contrast with the Model Articles for private companies. In this case there is no equivalent to Model Article 7(2) allowing a sole director to disregard decision-making provisions in the articles. Instead for public limited companies it provides that decisions of directors may only be taken at a directors' meeting or by a directors' written resolution. At the public limited company, Model Article 11(2) provides that ‘If there is only one director, that director may appoint sufficient directors to make up a quorum or call a general meeting to do so'. Under this model the sole director cannot disregard the other provisions concerning the decision-making of the directors in the model [See further Gore-Browne on Companies, 6[9]].

Government intention

The Department for Business, Innovation and Skills' guidance [http://www.bis.gov.uk/files/file53041.pdf] makes clear that there is no minimum number of directors set in the Model Articles. According to the guidance the Model Articles for private companies limited by shares were drafted on a ‘think small first' basis and so intended to make life easier for one-man-band-type companies.
Further support for this argument can be found on the Business Link [http://www.businesslink.gov.uk] website via which those wishing to incorporate can do so online with the Model Articles. This website confirms that a single person can form a private company and the director must be an individual [For public companies two directors are required but only one must be an individual. See further Gore-Browne on Companies, 15[7]]. It refers to Companies House guidance on incorporation, which makes clear that ‘You are not obliged to adopt the provisions of the model articles, but they are suitable for most standard companies ...' [Incorporation and names guidance at http://www.companieshouse.gov.uk/about/gbhtml/gp1.shtml]. If they were not suitable for one-man-band companies then it seems reasonable to expect the website to indicate this. It would also run contrary to ‘thinking small first' to then require small companies to go to the expense of tailoring their articles in order to allow a sole director to make any decisions.

Amendments to articles

Some practitioners have suggested that the wording of Model Article 7(2) tends to muddy the waters and have undertaken amendments to their own bespoke articles to address the position in a way they prefer.
Examples seen are along the following lines:
‘If, at any time the total number of directors is less than the quorum, the quorum shall be the total number of directors then in office.'
‘... the quorum for any meeting is any one director.'
‘The quorum for directors' meetings may be fixed from time to time by a decision of the directors, but unless otherwise fixed it is one. Article 11 of the Model Articles shall be modified accordingly.'
‘X.1 The minimum number of directors is one and, unless otherwise determined by ordinary resolution the number of directors is not subject to a maximum.
X.2 The quorum necessary for the transaction of the business of the directors shall be two except when there is only one director. Where there is only one director he may exercise all powers conferred on directors by these articles.'
In addition, others have addressed the question of eligibility to vote in relation to conflicts of interests as well so that where appropriate one eligible director will constitute a quorum.
Finally ...
It is hoped that at some point either by further guidance issued from BIS or when the Model Articles are next reviewed this issue will be revisited. This would ensure that for smaller companies, in particular, life is made easier and any proposed transactions are able to proceed as intended.

Kathleen O'Reilly
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