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The Model Articles only came into being from 1 October 2009 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. This has been raised to such an extent that some will be amending bespoke articles of association to remove any possible ambiguity.
This article focuses on private companies limited by shares although it applies equally to private companies limited by guarantee. The position is different for plcs as they are required to have two directors
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). However, not everyone agrees and there is some confusion on the point.
What is the confusion and how did it arise?
Some practitioners 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 -
to appoint further directors, or
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."
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.
In our experience, a number of lending banks are of this opinion too and this has potentially jeopardised client transactions we have assisted with, In these cases, the banks have required the articles to be amended.
The Better View?
In Jordans 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. This view is shared by Counsel from Erskine chambers with whom Jordans Limited settled its bespoke articles of association.
The contrary arguments seem to be broadly that the quorum requirement is a minimum number requirement. A contrast can be made between the wording here and that under Table A, which may be helpful.
Position under Table A prior to the Model Articles
Under Table A regulation 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. 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.
While Table A was in force, practitioners wishing to ensure a company's sole director could make decisions were used to altering regulation 64 of Table A in their articles as a matter of course
Perhaps the confusion partly arose as it used to be the case under Table A that articles always needed amending on this point?
The Department for Business, Innovation and Skills' guidance 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 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. 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...' If they were not suitable for one man band companies 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.
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.
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.
This extract is taken from an article written by Kathleen O'Reilly, Head of Internal Legal Services, Jordans Limited and originally published in Gore-Browne on Companies - Special Release March 2012 - Jordan Publishing Limited.
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