Sole directors: you may need to review your company’s Articles

It is commonly believed that Napoleon once referred to Britain as “a nation of shopkeepers”. He meant this contemptuously, of course, but the British, it seems, rather took a liking to it, even adopting the aphorism as something of a boast. We may no longer be a nation of shopkeepers but we are very much a nation of entrepreneurs. This noble tradition is complemented by the fact that the UK is one of the easiest countries in the world in which to create a company. It is possible for a British entrepreneur to form a company online in literally minutes with a few clicks of a mouse. In many other countries, this procedure can take weeks or even months.

But this convenience can mask hidden pitfalls.

What are Model Articles?

Every UK company must have Articles of Association, which are a set of rules governing the company. A company must act in accordance with its Articles and, although they can be, and often are, amended, any company action which contravenes the Articles is regarded as ‘ultra vires’ which is to say that the company has acted beyond its authority.

With UK companies, it’s possible to have only one director, known as a “sole director” and just one shareholder who may be the same person. But even these “one man bands” must still adopt a form of Articles of Association.

For most solo entrepreneurs, drafting a suitable set of sole director Articles necessitates them engaging the services of a solicitor who will draft a tailor-made, or bespoke, set of sole director Articles of Association. However, this can cost quite a lot of money that a start-up business may not be able to spare. In order to remove this barrier to entry, in 2008, the UK government introduced the concept of Model Articles, i.e., a standard set of generic Articles that could be immediately adopted by anyone wanting to start a company quickly and cheaply.

But it appears that there are dangers in blindly adopting the Model Articles, especially for sole directors who rarely, if ever, pay due attention to this blanket set of rules or consider whether or not they should be amended. In most cases, once their company is established, they simply want to plough ahead with their business. But the days of standard sole director company Model Articles may be drawing to a close.

The High Court weighs in

A decision in the English High Court earlier this year may force sole directors who have adopted the Model Articles to think again and review the situation.

The case involved a company that had adopted the Model Articles and had a sole director, Mr. Lorimer-Wing. Later, two other men, Mr. Hashimi and Mr. Gilbert, joined as directors and shareholders. The Articles were then amended to provide a bespoke Article which provided that a minimum of two directors was required for the company to be quorate.

The parties fell into dispute, which caused both Messrs Hashimi and Gilbert to resign, leaving Mr. Lorimer-Wing as the sole director again. The Articles were not amended to reflect this. Subsequently, Hashimi and Gilbert launched a claim against the company based on unfair prejudice. Mr. Lorimer-Wing issued a counterclaim which was ruled as unauthorised because the Articles still stipulated that the company required a quorum of at least two directors and that overrode the authority for Mr. Lorimer-Wing to act as a sole director. Consequently, his decision to issue a counterclaim was ‘ultra vires’, so unauthorised. The Court ruled that Mr. Lorimer-Wing was prohibited from issuing or pursuing the counterclaim.

The consequences

There is an unfortunate tendency among many business people to regard the Model Articles as merely a rubber stamp and fail to take them seriously. As can now be seen, this attitude can have seriously adverse and entirely unforeseen consequences down the road. Attitudes among sole directors, in particular, will need to change.

As a practical matter, first and foremost, any company with a sole director that has adopted the Model Articles without amendments should amend those Articles to allow a sole director to make authorised decisions on behalf of the company. This should be done sooner rather than later.

Secondly, they need to bear in mind that any such amendment would not apply retrospectively. So, if any unauthorised decisions have already been made, they will need to be ratified by a shareholder’s resolution to that effect. Furthermore, and as a general rule, the Model Articles should not be adopted for a private limited company without amendment where such a company has only one director.

Failure to do this may or may not lead to some sort of claim but, at the least, it may cause problems if investors are brought in later or if the company is being sold.

The best way for sole directors to ensure that the company Articles make for a safe and effective sole director company constitution is for them to seek professional legal advice. A lawyer who is experienced in company law matters will be able to ensure that the Articles cover the sole director fully and, to some extent, even future-proof them. Any entrepreneurs who may baulk at the cost should concentrate their minds on the greater cost of not doing this.

For further information and trusted legal advice regarding corporate law, get in touch with us at Carlsons Solicitors.

Nathan Wilkins