THE MODEL ARTICLES: FAILING TO

‘THINK SMALL FIRST’

March 9, 2023 Company Law, News, Undergraduate Laws Leave a comment
This post has been contributed by Professor Christopher Riley, Module Convenor for
Company law.

The Companies Act 2006 is supposed to be driven by a ‘think small first’ approach.
Where large and small companies need different rules, company law should adopt
those that fit smaller companies, leaving larger ones with the effort and expense of
making any necessary changes. 

Many – over 3 million – smaller companies choose to have only one director, as
s.154 Companies Act 2006 permits private companies to do. If UK company law is
really thinking small first, then it should have clear rules empowering these ‘sole
directors’ to run their companies alone. Unfortunately, two recent cases,
considered below, suggest UK law is hopelessly uncertain on this issue.   

The powers of directors are largely left for each company’s own articles to spell
out.  Again, company law helps by making available Model Articles, which many
small companies adopt.  What do the Model Articles for Private Companies (‘MA’)
say about the power of a sole director?

   
They begin by dealing with the situation where a company has multiple directors.
Article 7(1) says such directors will take decisions ‘collectively’, and Article 11(2) fixes
a quorum of two for board meetings.

The MA do, however, also address companies with a sole director. Article 7(2)
purports to allow a sole director to manage the company alone, and says that other
provisions in the articles (such as the quorum-of-two rule for board meetings) will
not then apply. It also recognises, however, that some – probably larger – private
companies may be unhappy for a sole director to run the company alone, and so
article 7(2) adds that a sole director can only do so if there is no other provision in
the articles which requires the company to have more than one director.

So, the intention here seems reasonably clear. Under the MA, a sole director can
operate alone; any company that is not happy for a sole director to do so, but still
wants to adopt the MA, must either remove Article 7(2) entirely or add in another
provision to the MA to make clear that the company must always have multiple
directors.

Unfortunately, in Hashmi v Lorimer-Wing  [2022] 191 EWHC (Ch) the court construed
the MA in a very different way.  Rather than seeing the quorum rule in 11(2) as
applying only when the company happened to have multiple directors, it read that
rule as itself a requirement that a company must have more than one director.  And
this requirement therefore prevented Article 7(2) from applying in the first place,
and so denied any sole director the power to run the company alone.

A more recent case – Re Active Wear  [2022] EWHC 2340 – has taken the opposite
view.  It says Article 11(2)’s quorum rule is not to be treated as a requirement that a
company that has adopted the MA must have multiple directors. Therefore, if a
company does have only one, Article 7(2) applies and that sole director can manage
the company alone.  This surely better reflects the intentions of those drafting the
MA, but nevertheless the position remains very unsatisfactory, for at least two
reasons.

 The two cases are both only High Court decisions, and so of equal value as
precedents. It is far from clear that in future courts will follow Re Active Wear’s
interpretation of the MA, rather than that offered in Hashmi.  
 The judge in Active Wear said his interpretation would apply only if the
company had never had more than one director. It is difficult to find anything
in the wording of the MA to justify this interpretation.

Ideally, the Government should update the MA to say unequivocally that a sole
director can manage alone unless the company has taken clear steps to deny a sole
director such authority.  Merely having the ‘standard’ quorum rule for board
meetings should not be treated as such a step.  In the meantime, hundreds of
thousands of smaller companies with the existing MA would probably be well
advised to amend their articles, to put beyond doubt that a sole director can
manage the company alone.  Yet this is precisely the sort of inconvenience and
expense that the ‘think small first’ approach was supposed to avoid.