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The reasons behind why many businesses are reviewing their articles of association
The articles of association form the constitutional framework of a company, setting out the rules governing how directors and shareholders manage and operate the business.
Many UK private companies adopt the standard model articles, prescribed by the Companies (Model Articles) Regulations 2008, when they are incorporated because they provide a simple and cost-effective default structure. However, recent court decisions and regulatory discussions have highlighted potential complications for companies operating with a sole director under these model articles.
In particular, questions have arisen about whether a single director can validly make decisions on behalf of the company when the articles include provisions requiring a quorum of two directors for board meetings. These developments have prompted many businesses to review their articles of association and consider whether amendments or additional directors may be necessary to ensure that corporate decisions remain valid.
Court cases with differing judgements
In 2024, the KRF Services case directly tested that point raised in previous cases as summarised below. KRF was a company that had adopted the model articles unamended and, following resignations, was left with only one director. The sole director authorised an application for an administration order. The court was asked to decide whether that decision was valid given the company’s constitutional provisions.
In KRF Services (UK) Ltd [2024] EWHC 2978 (Ch), the High Court delivered a significant judgement confirming that the unmodified Model Articles for private companies are suitable for companies with a sole director, even if the company previously had multiple directors. This decision offers further clarity on a legal debate that has evolved through several recent High Court decisions.
In 2022, in the High Court case Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) it was decided that a sole director acting under the model articles could not make valid decisions. Prior to this High Court ruling, it has long been known that two of the model articles seem to contradict one another; however, it has been widely held that Article 7(2) trumped Article 11(2). Read the details of this case.
The background to the case stems from uncertainty over whether the standard Model Articles of Association, the default constitutional rules companies adopt under the Companies Act 2006, properly empower a sole director to make decisions. This became controversial after the judgement in Hashmi v Lorimer-Wing (also known as Re Fore Fitness), where the High Court suggested the Model Articles were unsuitable for companies with only one director and therefore decisions taken solely by that director might be invalid.
In a later case in 2022, Re Active Wear Ltd [2022] EWHC 2340 (Ch), the High Court held that the Model Articles could be suitable for a sole director where the company had always only ever had one director and had adopted the model articles without amendment. The court interpreted Article 7(2) as disapplying the quorum requirement so long as no other provision required more than one director. However, that judgement also suggested and added an obiter that if a company had at any time in the past had more than one director, the sole director might not be able to act alone.
Possible solution
The deputy judge held unambiguously that the sole director could validly make decisions under the Model Articles, regardless of the company’s previous board composition. The judge explained that the earlier comments in Re Active Wear about historical directors were merely obiter and therefore did not prevent the sole director from acting alone in KRF Services.
In practical terms, where a company adopts the unmodified Model Articles, Article 7(2) functions to disapply related board decision-making provisions like Article 11 such that the sole director may act alone.
The judgement is welcomed for resolving longstanding uncertainty by confirming that the model articles are indeed suitable for companies with a sole director without amendment. However, it emphasises that this clarity only applies where the model articles are adopted in unmodified form; companies that amend provisions affecting minimum director numbers may still need bespoke drafting to avoid operational issues.
Background of provisions 7 and 11 of model article of association
Under the Companies Act 2006, all companies are required to have articles of association which set out the rules that directors and shareholders must follow when running their companies.
Alternatively, a company may choose to use tailor-made articles that are specific to that particular company. Article 7 of the Model Article includes the provision regarding how the directors should make decisions:
- The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
- 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.
Article 11 (1) states that at a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
Article 11 (2) provides the quorum for directors’ meetings – 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.
Article 11 (3) requires that if the total number of directors for the time being is less than the quorum required, the directors must not take any action 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’ articles of association are the standard default articles a company can use.
They are prescribed by The Companies (Model Articles) Regulations 2008.