The ability to make important business decisions is something that many company directors take for granted.
Model articles set out the rules for how a company should be managed and are adopted automatically when a business is incorporated, unless bespoke articles are put in place in addition to, or in replacement of some or all of the provisions in the model articles.
Until recently the consensus was that a sole director could make any decision about a limited company operating under model articles of association.
But a recent court case questioned the ability of sole directors to make decisions, which has potentially serious implications for business owners and buyers.
The definite article
When you set up and incorporate a company, you must have articles of association in place. These are rules that directors and shareholders need to follow.
How sophisticated these articles need to be usually depends on the size and nature of the company. If you’ve got multiple shareholders, or a complicated company structure, then you’re more likely to have your own tailor-made articles.
Many sole directors don’t think they need to go into that level of detail when starting out and fall back on the default model articles.
Two of a kind
The issue has arisen as a result of the recent case of Hashmi v Lorimer-Wing, where the High Court ruled that a private limited company operating under model articles should have a minimum of two directors. The case called into question the validity of decisions made by a sole director and cited a conflicting provision within the articles that states there should be two directors.
Another more recent case involving Active Wear complicated things still further when the High Court determined that a decision made by a sole director was indeed valid.
This decision was made on the basis that the company involved had always had a sole director and all decisions since incorporation had been made by just one person.
To say that the position is confusing as a result of the court cases is an understatement. So before making important decisions about your company, consider putting your own bespoke articles in place, especially if you have previously had more than one director on your board.
Failure to do so could have major ramifications for sole directors and business purchasers. A potential buyer won’t want to pick up the tab for any future losses that may be incurred because of invalid decisions you made as a sole director. They may therefore insist on a wide-ranging indemnity to cover themselves.
But by stating clearly that you alone can make lawful decisions about your business, you can avoid having your authority called into question at a later date.
Emily Eccles is a senior associate at the law firm Mogers Drewett in Bath where she specialises in corporate commercial work for a wide range of businesses. She advises on everything from commercial and shareholder agreements to more complex transactional work such as mergers, acquisitions and restructuring advice.
