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Sole Directors and the Model Articles: What you need to know!
All limited companies must have articles of association. A company’s articles are its constitution and set out the rules governing the Company as well as the rights attaching to its shares and how its shareholders are to engage with one another. When a company is just starting out, it will often adopt the Model Articles for private companies limited by shares which are the default set of articles that a company can use. The Model Articles provide many standard provisions that a company will need and ensure that the directors and the company are acting in accordance with the Companies Act 2006. Many companies will begin their journey with a sole director and shareholder - one person working tirelessly to develop the business, the product and grow a supportive network.
Many people may be unaware of certain nuances in the application of the Model Articles where a company has (or has had) a sole director and which could put a sole director in a bind. Consider Model Articles 7 and 11 for example; these Articles outline the rules a company needs to follow when making decisions.
- The general rule, according to Article 7(1), is that a decision of the directors must be a majority decision.
- Article 7(2) then goes on to say that if a company only has one director and no other articles that state they need more than one director, the general rule in 7(1) does not apply.
- We then have Article 11(2) which says that the quorum for board meetings can be fixed by a decision of the directors, but the quorum must never be less than two directors. If the directors don’t decide what the quorum should be, then the quorum will automatically be set at two.
It was customary for Article 7(2) to apply when a company has a sole director and 11(2) would apply if the company had more than one director. However, the decision in Hashmi v Lorimer-Wing and Fore Fitness Investment Holdings Limited [2022] EWHC 191 (commonly known as Fore Fitness) changed this approach. This case determined that instead of these provisions being applied separately, they would be applied together. This meant that if your company had Model Articles and a sole director, you did not have the power to make decisions, other than to appoint another director (in order achieve the required quorum of two), unless Article 11(2) had been disapplied.
This caused uncertainty for sole directors and companies which had adopted the Model Articles. There was a further case a few months after Fore Fitness, Re Active Wear Limited (In administration) [2022] EWHC 2340 (Active Wear), in which the judge offered a different approach from what had been decided in Fore Fitness. The decision in this case was that Article 7(2) disapplied the decision-making provisions in the Model Articles when a company had a sole director. Therefore, this would disapply Article 11(2) and means that you would treat Articles 7(2) and 11(2) much like they had been before the decision in Fore Fitness.
It is important to note however that there were particular aspects of Active Wear which led the judge to differ from the Fore Fitness judgement:
(1) Active Wear had adopted the Model Articles without any amendments whereas Fore Fitness had adopted amended Model Articles; and
(2) there had only ever been one director of Active Wear in the company’s history.
At the end of November 2024, a long-awaited High Court decision provided some clarity on sole directors and decision making. In KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) (KRF Services) it was decided that a sole director of a company which has adopted the Model Articles without any amendments can make decisions on behalf of the company irrespective of the number of directors it has had in the past.
It is important to note, that the cases mentioned above are English cases and not binding Scotland but no doubt they will be very persuasive.
If you are a sole director with Model Articles and this is something you are concerned about, there are ways to ensure that the decision of a sole director remains valid.
For example, if a company with a sole director is looking to raise investment, its investors may ask for ratification of previous decisions made through a shareholder resolution. This is where the company obtains shareholder consent to ratify and approve any previous decisions made by the sole director. By passing a shareholder resolution, the shareholders provide further protection for the company in case the validity of decisions are put into question.
Model Articles are a useful option for “getting started”, but are not fit for purpose in our view if the company allots shares to new shareholders – for example, the Model Articles do not contain drag and tag along provisions, pre-emption on transfer and leaver provisions.
Looking to read more on the model articles? Click here for my colleague Hannah Brazel's blog which goes on to discuss when it is the right time to move away from the Model Articles.
