Model Articles – are you quorate as a sole director?
A High Court case has shone a light on how the Model Articles work when there is a sole director and come up with an unexpected result. In summary, unless the Model Articles are modified there is an argument that a sole director does not have authority to act. As a result, decisions made by a sole director may be held to be invalid.
The reason for this is the interplay between Articles 7 and 11 of the Model Articles. Article 7 requires decision making to be by majority decision. This effectively requires a quorate meeting or a decision by all eligible directors who would have formed a quorate meeting.
Article 11(2) states that the quorum for directors meetings is a matter for agreement but should never be less than two directors.
It has been generally assumed by corporate lawyers that this quoracy requirement in Article 11(2) is over-ridden by Article 7(2) which states as follows:
“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.”
This was based on an understanding that Article 11(2) did not impose a minimum number of directors but instead just dealt with quoracy requirements if there was more than one director.
However, the Judge in the case of Hashmi v Lorimer-Wing  EWHC 191 (Ch) looked carefully at the wording of the Model Articles and the inter-action between the two articles in a wider context and concluded that Article 11(2) does require the company to have at least two directors. On that basis Article 7(2) does not assist as there is an article requiring the company to have more than one director.
This is not how the Model Articles have generally been interpreted to date and it is likely that many companies with sole directors have simply adopted them in an un-amended form.
On a day to day basis this technical legal point might not seem to matter. However, if things get contentious and there is any dispute with regard to a decision made by a sole director in the company you can expect that this point will be deployed as an argument that the decision is invalid. This could have serious consequences for the director and the company.
Unless this situation is resolved by another judicial decision this represents a significant risk for sole directors in companies who have adopted the Model Articles. To mitigate this risk companies should amend the Model Articles to confirm that there is no requirement for a minimum of two directors and if there are any concerns about historic decisions, ratify those decisions.