The High Court found that a sole director was not authorised to act on behalf of a company due to contradictory provisions in the company’s articles of association based on the Model Articles.
A shareholder of the company, H, made an “unfair prejudice petition”. This is a remedy open to shareholders where the company’s affairs are being or have been conducted in a way which is prejudicial to some or all members, including the party bringing the petition. The company, acting by its sole director, LW, brought a counterclaim against H. The Court considered whether a sole director was able to counterclaim on behalf of the company.
Under legislation, a private company must have at least one director. The Model Articles, which are the default articles of association for limited companies incorporated on or after 1 October 2009, do not expressly set a minimum number of directors. However, a company can adopt bespoke articles which amend the Model Articles.
In this case, the company’s articles of association contained a mix of Model Articles and bespoke articles, including:
The Court concluded that a provision in the articles requiring a quorum of at least two “logically is a requirement that the company must have two directors in order to manage its affairs”. Article 7(2) was clear that it only allowed a sole director to take decisions where there was no provision in the articles requiring the company to have more than one director. Both Articles 11(2) and 16 required there to be at least two directors making decisions at meetings. This meant that LW, as sole director, did not have the power to issue the counterclaim against H on behalf of the company, and the counterclaim was therefore struck out.
The judge found the Model Articles must be amended to permit a sole director to run a company, and such an amendment would need to include the deletion of Model Article 11(2). In this case, the parties had instead reinforced the requirement in the Model Articles to have at least two directors by adding bespoke Article 16.
This case is a somewhat surprising interpretation of the Model Articles. Model Article 11(2) has previously been widely interpreted as forming part of the “general rule” about decision-making by directors which does not apply where there is a sole director under Model Article 7(2) (for example, BEIS considered in its guidance on the Model Articles that they did not provide for a minimum number of directors). This case has challenged that view, and therefore has implications for sole-director companies which have adopted Model Articles 7 and 11 (or equivalent articles).
This issue may be clarified in future case law. However, in the meantime, sole-director companies, or any companies which may operate with a sole director, should consider whether it is necessary to amend their articles of association. We also recommend companies with articles based on the Model Articles consider taking advice on the validity of any decisions taken by sole directors in the past, as this case suggests there could be grounds for challenging such decisions. If you have any questions or concerns, please speak to your usual Sackers contact.