The Articles, the Director & the Quorum: A Company law update

posted by KeithDaniel

Emma Borrington, Corporate Finance Partner at Berry Smith, considers the recent case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch and its implications for private limited companies in England & Wales with Sole directors and incorporating model articles.

The corporate world is rarely described in Narnia-like terms but the recent case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch has left corporate lawyers and director alike, scratching their heads and wondering if they have stumbled into a brave new world. The articles, the director and the quorum; three indispensable axioms of company law, thrown into jeopardy with the swish of a judicial pen. Let’s take them each in turn.

The Articles

The articles of association are the bedrock of a company, its binding constitution and contract, and the framework within which directors and shareholders must remain in order to make legally binding decisions for the company. Many companies in England & Wales adopt the “model” articles of association for simplicity and clarity.

“Model” articles of association are the standard default articles a company can adopt and are prescribed by The Companies (Model Articles) Regulations 2008. These are designed to allow the smooth operation of companies with simple and effective rules and procedures, or so we thought.

The Director

The directors are charged with the decision making in a company; they direct the company’s affairs. In order to make a decision, the directors must hold a board meeting and the rules governing the meetings of directors are prescribed (sometimes in quite some depth), in the company’s articles of association.

The Quorum

A quorum is the minimum number of directors that must be present at a board meeting in order for it to be legal and for binding directors resolutions to be passed. This is typically set at one, or possibly two directors. Again, this will be prescribed in the Company’s articles.

The “model” articles provide for this in articles 11 (2) confirming: 

“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.”

However, sole director companies in England & Wales have traditionally relied on model article number 7 (2) in order to make legally binding decisions. This confirms:

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.”

The traditional interpretation of these provisions in combination, being that sole director companies are able to hold quorate board meetings and therefore run companies in spite of their adoption of the model articles of association.   

The Brave New World

The recent case of Hashmi v Lorimer-Wing throws that traditional interpretation into jeopardy. The judgment confirms that the correct interpretation of model article 11(2) is that the quorum for meetings of the directors of a company is two, regardless of whether there is a sole director.

Article 7 (2) does not come to the rescue; the model articles require a quorum of at least two directors under article 11(2), which constitutes  a “provision of the articles [that] requires it to have more than one director”, meaning article 7(2) does not apply to sole director companies with model articles of association.

This has made sole directors powerless and effectively paralysed sole director companies with model articles of association, rendering them unable to hold a quorate board meeting and make decisions that have legal effect. The High Court confirmed a company that intends to operate with only one director, would need to modify the model articles to permit a quorate, single director board meeting.

Conclusions

The brave new world requires careful navigation for sole director companies with model articles of association in England & Wales.

Their best option is to use some corporate law magic to amend the quorum requirements in their existing articles of association or take the opportunity to adopt new, bespoke articles. The other alternative is to appoint a second director to make board meetings quorate but this invariably results in the delegation of half the board’s voting power to a further director.  

Either way, doing nothing isn’t really an option for sole director companies with model articles in England & Wales anymore; they will have to change; the articles, the director or the quorum.

For further information or advice, you can contact Emma on 029 2034 5511 or eborrington@berrysmith.com