11 October 2024
AMD’s Grant McCall discusses Model Articles of Association, sole director companies and share buybacks
All companies are required to have a set of Articles of Association which govern how the company makes decisions and the powers of those involved in the company. For private limited companies in the UK, the Model Articles are the default set of Articles and as such are commonly adopted. The Model Articles are free to be amended or replaced for more bespoke requirements. For companies with a sole director, it is worth reviewing to make sure the Articles are fit for purpose.
Model Articles and sole directors
Model Articles 7 and 11 deal with how directors can take decisions. Article 7 provides the general rule that director decisions must be made by majority subject to Article 7(2) which states:
“if –
- the company only has one director, and
- no provision of the articles requires it to have more than one director,
the general rules does not apply and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”
Article 11 states that “The quorum for directors’ meetings… must never be less than two, and unless otherwise fixed it is two.”. This creates a possible contradiction between article 7 and article 11. Article 11could be seen as a provision requiring more than one director as it states that the quorum (being the minimum amount of directors present to make a valid decision) can ‘never be less than two’.
So which Article takes precedence?
Until relatively recently it was generally understood that Article 7 intended for sole directors to be able to execute board decisions. A case from 2022 (Hashmi v Lorimer-Wing) cast some doubt on this however, where the judge ruled that Article 11 was a clear caveat to Article 7 and any decision made by a sole director was outside of their authority. In contrast, another (unreported) 2022 case (Re Active Wear Limited) found that Article 11 was disapplied by Article 7 in cases of sole directors with unamended Model Articles.
Risks of contravening the model articles
A risk of contravening a company’s articles is that board decisions made without requisite authority could be invalid. This could be a particular issue in relation to a share buyback which requires a certain procedure to be followed. If a company fails to comply with the procedural requirements before implementing a share buyback, it could mean that a selling shareholder who had been paid for their shares, would still remain the legal owner of the shares and entitled to dividend payments since the void buyback (even though they had received the sale price for their shares).
What can companies with a sole director do going forward?
As there is potential for uncertainty for decision making of sole directors who adopt the model articles, for belt and braces, a sole director company could:
- appoint an additional director to ensure any meetings are quorate, or
- amend the model articles to allow for decisions to be made by a sole director.
If you would like any assistance with your company’s articles of association or in planning for a company buyback of shares, please contact AMD’s corporate and commercial team on 0117 973 3989, email info@amdsolicitors.com or drop into one of our four Bristol offices.
