It is important for all limited companies, especially SMEs, to ensure that their articles of association are drafted in such a way that, in the event of the death of one of the directors and/or shareholders, those who remain have power to appoint new directors and take decisions on behalf of the company.
A widow’s conundrum
I was recently instructed by an insolvency practitioner who had been approached by the widow (W) of a deceased director of a small limited company. W wished to place the company into members’ voluntary liquidation (MVL). Her deceased husband (H) had been the sole director and H and W were the only shareholders, W holding less than 25%.
The Model Articles contained in Schedule 1 of the Companies (Model Articles) Regulations 2008 applied save where modified, but this presented W with a problem. As the company had no directors following the death of H it could not pass a resolution authorising the MVL, or any other resolution.
Although W, as shareholder, had power to call a general meeting under the articles, a quorum of two is required unless the company only has one member. In this case, H’s shareholding vested in his estate of which W was executor and sole beneficiary, but a board resolution was required to register the transfer of the share into her name. Therefore, W was unable to pass a resolution to appoint a director at a shareholder meeting because the shareholder meeting would have been inquorate and unless and until a director was appointed H’s shares could not be transferred to W to enable the shareholder meeting to be quorate.
The articles provided that:
“In any case where, as a result of death or bankruptcy, the company has no shareholders and no directors, the transmittee(s) of the last shareholder to have died or to have had a bankruptcy order made against him (as the case may be) shall have the right, by notice in writing, to appoint a person…who is willing to act, and is permitted to do so, to be a director.
W fell within the definition of a “transmittee of the last shareholder to have died” but she was not able to avail herself of this article because it only applied where the company had no shareholders and no directors. In this case the company did have a remaining shareholder, W, so this provision did not apply.
The only option available to W was to make an application to court for the appointment of herself as director, which was an expense she could ill afford at a time when she was bereaved and having to deal with the administration of H’s estate. Because the company was no longer trading, the delay involved in a court application was not an issue, but it could well have been if the company was insolvent and had there been a pressing need to commence a formal insolvency process.
This conundrum could have been avoided with some careful drafting of the articles.
Interpreting model articles #1
The recent High Court judgment in the case of Re Active Wear Ltd [2022] EWHC 2340 (Ch) highlighted inconsistencies in the drafting the Model Articles where a company has a sole director. In this case R had been the sole director since the company’s incorporation. In March 2022 the company became insolvent, and R appointed administrators pursuant to paragraph 22 of Schedule B1 of the Insolvency Act 1986.
The company had adopted the Model Articles without amendment.
The relevant Model Articles were as follows.
Article 7 - Directors to take decisions collectively
(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
(2) If
(a) the company only has one director, and
(b) no provision of the articles requires it to have more than one director,
the general rule 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 8 - Unanimous decisions
(1) A decision of the directors is taken in accordance with this article when all eligible directors indicate to each other by any means that they share a common view on a matter.
(2) Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible director or to which each eligible director has otherwise indicated agreement in writing.
(3) References in this article to eligible directors are to directors who would have been entitled to vote on the matter had it been proposed as a resolution at a directors’ meeting.
(4 A decision may not be taken in accordance with this article if the eligible directors would not have formed a quorum at such a meeting.
Article 11 - Quorum for directors’ meetings
“(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision –
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.”
Section 154 of the Companies Act 2006 states that the minimum number of directors for a private company is one and the Model Articles prescribe no minimum number.
In this case R had produced signed board minutes authorising the appointment of administrators in circumstances where there had in reality been no meeting. She could instead have produced a written resolution under Article 8, but had she done so the question as to quorum would still have arisen.
Because of the inconsistency between model Article 7 which appears to give a sole director full authority to take decisions and Article 11 which seems to suggest that a quorum of two is required, the joint administrators applied to court for a declaration that their appointment was valid and in accordance with the company’s articles. The judge held that the appointment was valid on the basis that, where a company has only ever had one director, Article 7(2) overrides Article 11(2) such that the quorum becomes one.
Interpreting model articles #2
The judge in the Active Wear case accepted that this decision contradicted a previous decision of the High Court in Re Fore Fitness Investments Holdings Ltd but his reasoning was that otherwise article 7(2) would be obsolete and he distinguished Fore Fitness.
In Fore Fitness the company had adopted the Model Articles but with modifications including a bespoke Article 16 which expressly specified a quorum of two directors for board meetings so the judge in that case held that Model Article 7(2) was therefore disapplied.
In Active Wear, the judge made an “obiter” comment to the effect that the position would be different where the company had originally had more than one director and that in these circumstances article 11(2) would not be disapplied and the quorum would be two. Obiter comments are opinions expressed by the judge which do not form part of the binding judgment which in this case render the judgment less helpful than it might otherwise have been in clarifying this issue.
It is also worth emphasising that when hearing actions at first instance the High Court, is not bound by other first instance decisions, so it would be open to a future court to decline to follow Active Wear and as such there remains a degree of uncertainty as to the validity of decisions taken by a sole director.
Conclusion
It is important for companies to regularly review their articles to ensure that they are relevant and fit for purpose, and that where the number of directors is or falls below two, the articles are clear in setting out the powers of remaining directors to act and the ability of shareholders to appoint additional directors.
