Beware the Articles of Association – all articles must work together!

The High Court has held that a company which adopted the Model Articles with slight modifications was unable to properly conduct business, having only one director.

Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch) was about an unfair prejudice petition by a shareholder of a company under section 994 of the Companies Act 2006 (the ‘Act’).

Whether the company had validly served notice of a counterclaim against the shareholder was brought into question as part of this case. The application was successful on the basis that the purported authorisation of the counterclaim was ultra virus since, properly interpreted, the Company’s articles had not been complied with.

Analysis

As is common, the company’s constitution was based on the model articles for private companies limited by shares (the “Model Articles”) with certain modifications.

The 4 articles at the centre of the case are as follows:

1. Model Article 7(1) – Directors are to take decisions either in a board meeting or via written resolution. This is called the general rule.
2. Model Article 7(2) – While a company has only one director and its articles do not require it to have more than one, the general rule does not apply. The sole director can make decisions regarding running the company.
3. Model Article 11(2) – The quorum for directors’ meetings can be fixed from time to time, but it cannot be less than two, and the default quorum is two. In this case, the Fore Fitness modified Model Article 11(2) to require specific directors to be present to form a quorum.
4. Model Article 11(3) – If at any time the total number of directors is less than the quorum, the directors must not take any decision other than: (i) to appoint further directors; or (ii) to convene a general meeting to enable the shareholders to appoint further directors.

Seemingly, Model Articles 11(2) and 11(3) appear to contradict Model Article 7(2). However, the approach taken thus far has been that Model Article 11(2) and 11(3) form part of the general rule, therefore, while a company has a single director, they do not apply. Instead, Model Article 7(2) allows the sole director to take all decisions. Model Article 11(2) only applies where the company has multiple directors and needs to hold a board meeting and Model Article 11(3) only applies if the company does not have enough directors to form a quorum for that meeting. Model Article 11(2) sets the quorum for a board meeting, but it does not set a minimum number of directors of the company.

The shareholder insisted this traditional viewpoint was wrong and that the quorum provisions in the Articles (in this case, modified Model Article 11(2)) did require the company to have at least two directors. When the counterclaim was served, however, the company had only one director. Therefore the issuing of the counterclaim was ultra virus.

As stated above, the court agreed with the shareholder. The judge noted the articles requiring there to be at least two directors to constitute a quorum and stated logically is a requirement that the company in question have two directors in order to manage its affairs. Despite the company adopting a bespoke article requiring two specific individuals to be present for a meeting to be quorate, the judge’s comments were quite clearly also directed at unmodified Model Article 11(2).

The company claimed as section 154 of the Act permits companies to have a single director, the Model Articles could not abrogate that provision of an Act of Parliament. However, the judge found that, although the Act contemplates companies with only one director, the Model Articles cannot be used in unmodified form in these circumstances. The Act specifically permits a company to modify the Model Articles, and modified they must be to operate with a single director.

Implications for Public Sector Companies

When looking to establish a new company, any perceived contradiction in the Articles should be carefully thought through. The Model Articles state that a quorum for a director’s meeting is at least two directors. However, they also say that a company can act with one director. The implication is the Model Articles are unclear as to what constitutes a quorate director’s meeting. Perhaps, the best solution is to ensure bespoke provisions are drafted to make it clear how many directors are required for a quorate meeting.

Established companies should review their Articles to identify whether they have adopted Model Articles 7 and 11 without modification or, have adopted bespoke articles that mirror the original wording. Where this has happened, the company should decide whether it needs the flexibility of being able to operate with one director. If it does, the company should consider putting forward amendments to its Articles to resolve this contradiction. If it has historically operated with only one director, it should consider obtaining advice on whether any historic decisions taken by the sole director are or may be void.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email enquries@sharpepritchard.co.uk.