New Year's Resolution?

2022 offered some interesting debate about sole director companies which had chosen to implement the Model Articles and how (or whether) certain provisions of the Model Articles applied (or not).

If you are one for making New Year’s resolutions, why not resolve to ensure that your company paperwork is in order?

When a company is incorporated, Articles of Association (Articles) need to be prepared.  These form the constitution of the company and govern how the company operates as well as setting out the powers of directors and shareholders and covering matters such as dividends, communications and shares.  A company may wish to prepare bespoke Articles but for many, it is seen as more convenient to adopt what is known as the Model Articles.

Prior to 2022, the general consensus within the legal industry was that Model Articles 11(2) and 11(3) did not apply to sole director companies courtesy of the provisions of Model Article 7(2).

• Model Article 11(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.

• Model Article 11 (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.

• Model Article 7(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.

Doubt was cast on this general consensus during 2022 however.  The facts of the relevant cases are probably only of interest to lawyers in this field but at one stage during the year it was considered that a sole director company could not have un-amended Model Articles as the wording called for at least 2 directors, making decisions taken by sole directors invalid.

This could have had far reaching consequences for many companies and sent sole directors and their advisers scrambling to look at their options.  As the year continued however, further caselaw emerged which shed light on the issue and restored the general consensus position of lawyers in this field.

The differing decisions came from differing circumstances which we will not go into here but suffice to say that it has highlighted again that company’s should periodically review their Articles to ensure that they are kept up to date and work on a practical level for their company.  There is no telling what further caselaw may come but a company can ensure they are best prepared with clear, up to date, practical Articles.

Now is a good time at the start of the year to take a quick look at your Articles to make sure they are fit for purpose.  We are happy to assist with that should you so desire and you should contact Iona Garland or Cameron Milne, or email aberdeen@mackinnons.com