All limited companies must have articles of association, a set of rules to be followed in running the company.
“Model Form” articles are in a standard format (prescribed by the Companies Act) and that Model Form will apply if the company does not choose to have a set of articles specifically prepared for it.
There are many reasons why the Model Form articles may not be suitable, and a recent court case has highlighted one such issue, the number of directors needed to form a quorate meeting. The quorum is the number of directors required to be present at a meeting for the proceedings at the meeting to be valid.
This mean sole directors of companies that have adopted Model Articles may find they are unable to make valid decisions.
Background
Model Article 11 (2) says 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.
Model Article 7 says that any decision of the directors must be either a majority decision at a meeting, or a unanimous decision(taken in accordance with Model Article 8). Model Article 7 then goes on to say that if (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, then certain formalities which would otherwise apply to making director decisions do not apply.
There has been some doubt about the way these two Model Articles work together – some people felt that Model Article 7 meant that just one director (a sole director) was always able to act and able to make all decisions.
However, the judgment in the recent case was that Model Article 11(2) actually amounts to a requirement for a quorum of two directors. So two directors must be present for the meeting to be quorate. Effectively this means that a company which uses the Model Articles (unamended) must have at least two directors to manage its business and make decisions about the company.
Solution
Under the Companies Act 2006 a company can choose not to use the Model Articles at all, or to use some of the Model Form articles and to amend others. If a private company wants to have a sole director it may do so, but will need to have specially prepared articles, or at least to amend these provisions of the Model Articles.
Please speak with your usual contact at Peplows for further help or assistance.