In a recent High Court decision, the court interpreted a company’s Articles to determine whether a sole director had the authority to act on behalf of the company.

The case focused on the interaction between Article 7 (Directors to take decisions collectively) and Article 11 (Quorum for directors’ meetings) of the Model Articles, along with a bespoke article drafted by the company, Article 16, which set quorum for board meetings at two directors.

The Model Articles are the default set of rules detailing how a business will be governed including the processes for appointing and terminating directors, and for organising directors’ and shareholders’ meeting. It is a mandatory requirement for businesses to have a set of Articles which are publicly available and registered at Companies House when the business is incorporated.

Hashmi v Lorimer-Wing

In Hashmi v Lorimer-Wing, a dispute had arisen when the company attempted to submit a counterclaim against a claim brought against it for unfair prejudice.

As there was only one sole director who had approved and filed the counterclaim, it was successfully argued that the decision was invalid as the company’s Articles required quorum for a board meeting of two directors as set out in their bespoke Article 16. The sole director therefore did not have the authority to approve the counterclaim on behalf of the company.

The key Articles considered in the case were:

• Article 7 (Model Articles): Article 7(2) states that where a company only has one director, no provision of that 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.
• Article 11 (Model Articles): Article 11(2) of the Model Articles states that 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. The interplay between Article 11(2) and Article 7 of the Model Articles has historically been unclear.
• Article 16 (Bespoke Article): The company had implemented a bespoke Article which modified Article 11(2) and required quorum for a board meeting of "two Directors one of whom must be an Investors' Director (if appointed) and one the Executive.”

Decision

After closely considering the wording of the Articles and the bespoke Article 16, the High Court concluded that the construction of Article 11(2) does in fact require a company to have at least two directors. This meant that the quorum requirement for two directors prevented the sole director from acting on behalf of the company.

The argument that a company could circumvent the requirement to have a quorum of at least two directors due to the wording of Article 7(2) prevailing over Article 11 was determined to be incorrect by the High Court.

Discussion

Although the impact of this decision may be minimal in the immediate future, if a company is involved in a dispute in the future, the quorum requirements may be used as an argument to invalidate any decisions that were made by a sole director. A financial lender is also likely to assurances from any company that it has the relevant authorities to act and to enter into financing arrangements.

The company’s inclusion of the bespoke Article 16 may have been a persuasive factor for the court in its interpretation of the Articles and it is possible that a Court would not come to the same conclusion where a company has unamended Model Articles. Nevertheless, we would recommend that, for companies with a sole director:

• sole directors initially review their company’s Articles to review the provisions relating to quorum and number of directors; and
• amend their Model Articles to change the quorum to a minimum of one where the company only has one director and ratify previous decisions to ensure their validity if appropriate.

Our corporate team would be delighted to discuss these issues further and, if required, they can assist you with the relevant drafting and amending your Articles. We can be contacted on 0345 241 5305 or by completing the contact form found on this page.