Pay attention to the statuses – all articles must work together!
The High Court held that a company which had adopted the standard articles of association with slight amendments was unable to conduct its business properly, having only one director.
Re Fore Fitness Investments Holdings Ltd  EWHC 191 (Ch) concerned a claim for unfair hardship brought by a shareholder of a company under section 994 of the Companies Act 2006 (the “Act”).
The question of whether the company had validly notified a counterclaim against the shareholder was questioned in the context of this case. The claim was granted on the grounds that the alleged authorization of the counterclaim was an ultra virus since, properly construed, the Company’s Articles of Association had not been complied with.
As is common, the incorporation of the company was based on the Model Articles of Private Partnership Limited by Shares (the “Model Articles”) with certain modifications.
The 4 articles at the center of the case are the following:
- Model Article 7(1) – Directors must make decisions either at a board meeting or by written resolution. This is called the general rule.
- Model Article 7(2) – As long as a company has only one director and its articles do not require it to have more than one, the general rule does not apply. The sole administrator can make decisions concerning the management of the company.
- Model Article 11(2) – The quorum for directors’ meetings may be fixed from time to time, but it cannot be less than two, and the default quorum is two. In this case, Fore Fitness has amended section 11(2) of the model to require the presence of specific directors to form a quorum.
- Model Article 11(3) – If, at any time, the total number of directors is less than the quorum, the directors shall take no action other than: (i) appoint other directors; or (ii) to call a general meeting to enable the shareholders to appoint other directors.
Apparently, model articles 11(2) and 11(3) seem to contradict model article 7(2). However, the approach taken so far has been that model Articles 11(2) and 11(3) are part of the general rule, therefore, even if a company has only one director, they do not not apply. Instead, Model Article 7(2) allows the sole administrator to make all decisions. Model Article 11(2) only applies where the company has more than one director and needs to hold a meeting of the board of directors and Model Article 11(3) only applies where the company has not enough directors to constitute a quorum for that meeting. Model Article 11(2) sets the quorum for a meeting of the board of directors, but it does not set a minimum number of directors of the company.
The shareholder insisted that this traditional view was wrong and that the quorum provisions in the articles of association (in this case the amended model article 11(2)) did require that the corporation have at least two directors. However, when the counterclaim was served, the company had only one director. Therefore, the issuance of the counterclaim was ultra virus.
As indicated above, the court agreed with the shareholder. The judge noted the sections requiring that there be at least two directors to constitute a quorum and logically indicated that it is necessary for the company in question to have two directors to manage its affairs. Although the company adopted a bespoke article requiring the presence of two specific people for a meeting to be valid, the judge’s comments were also very clearly aimed at Article 11(2) of the unamended model.
The company claimed that section 154 of the Act allowing companies to have a single director, the standard sections could not repeal this provision from an Act of Parliament. However, the judge found that although the law contemplates single-director corporations, the standard articles cannot be used in unmodified form in these circumstances. The law specifically allows a corporation to amend the standard articles, and they must be amended to operate with a single director.
Implications for public sector companies
When considering forming a new corporation, any perceived contradictions in the articles of association should be carefully considered. The standard articles state that a quorum for a meeting of directors is at least two directors. However, they also say that a corporation can act with only one director. The implication is that the standard articles are not clear as to what constitutes a quorum meeting of directors. Perhaps the best solution is to ensure that bespoke provisions are drafted to clearly state the number of directors required for a quorum meeting.
Established corporations should review their articles to determine whether they have adopted model articles 7 and 11 without modification or whether they have adopted bespoke articles that reflect the original wording. When this has happened, the business must decide if it needs the flexibility of being able to operate with a single administrator. If so, the company should consider proposing amendments to its articles of association to resolve this contradiction. If it has always operated with a single director, it should consider seeking advice on whether historical decisions made by the single director are or may be void.