When one director is not enough…
If you’ve already set up a limited company, you’ll probably have a dim and distant memory of some of the documents required. People often talk about ‘mem and arts’ whilst they’re in the process of incorporating, and then the subject stops being a topic of conversation pretty soon after that. And, if you’re like many business owners, you’ll have your memorandum of association and articles of association filed in a dusty corner, never to be looked at again.
However, a recent court case has brought articles of association under the spotlight. So, once you’ve finished reading this, you may find yourself grabbing the Mr. Sheen, dusting off your files, and having a good read.
Let’s take a quick step back to remind ourselves what the memorandum and articles of association are.
What are your ‘mem and arts’?
Your memorandum of association is a “legal statement signed by all initial stakeholders or guarantors agreeing to form the company.” The document includes key information about the business including company name, date of incorporation, type of company, the act under which the company is registered, names and signatures of original stakeholders or guarantors, and a statement about the limited liability of shareholders or guarantors. Individuals who add their name to the document become a member of the company. And details of members are made public through the Companies House website.
Your articles of association, on the other hand, set out how a company is run. The document clarifies how the company is governed and owned by its members. For example, it will stipulate the restrictions on the company’s power by including the following information: directors’ powers and responsibilities; how decisions are made; how directors are appointed or removed; and details of any indemnity and insurance that is provided by the directors. It will also include information on shares, how the shares are distributed, and how dividends are distributed. There will be mention of the capitalisation of profits and shareholders. Plus, how general meetings are conducted and who has voting rights etc.
Are there standard versions of these documents available?
Yes, there are. There is a standard format for the memorandum, mainly because the document requires the same information to be included for all companies. There is also a standard form of articles, called model articles, and if you use these, it makes incorporating quick and easy. With that said, however, you can customise your articles. Though if you do this, you must notify Companies House when you incorporate so they can review your draft to check they are acceptable.
Is it ok to just use model form articles?
As long as the statements set out within the standard document apply to your business then, yes, you can just use model form articles. However, there are many reasons why model form articles may not be suitable. And a recent court case has highlighted one of the issues that can arise when a standard set of articles are in place.
The issue the court had to consider was related to the number of directors needed for a quorate meeting. Some specifics and a little detail are needed to explain this.
Article 11 (2) says that a decision of the directors can apply when it comes to the quorum; though it must never be less than two directors and, unless otherwise fixed, it will be two.
Article 7 states that any decisions of the directors must be a majority decision or a unanimous decision in accordance with Article 8. And Article 7 then says that if a company only has one director, and no provision of the articles requires it to have more than one, certain formalities which would otherwise apply to a director’s decision, actually do not apply.
Straight off, it’s clear there is a conflict between articles 11 (2) and 7. Article 7 means that a sole director is able to act and make all decisions, whereas Article 11 (2) counters that.
The recent case considered this with particular respect to the impact of Article 11 (2). The judgement in the case was that Article 11 (2) amounts to a requirement for a quorum of two directors. Now, that’s all well and good when you have two or more directors in a business. However, for limited companies with one director only, this is a problem.
What’s the solution?
As already mentioned, under the Companies Act 2006 a company can choose not to use the model form articles. Instead, they can use just some of articles and amend others. Thus, if a private company wants to have a sole director it may do so, but it will need to have specially prepared articles, or at least amend the provisions of the articles.
Who can make the necessary amendments?
It’s wise to get professional advice for this. Those forgotten documents stored in a filing cabinet tend to only come out when there’s a problem, so it’s important that the company is set up correctly in the first place. Company secretaries, solicitors that specialise in company law, and qualified accountants are the people to turn to. They’ll give you the guidance you need to be able to make key decisions on the formation of your company. Plus, they’ll provide you with the wording you need too.
It’s worth noting that if you’ve already incorporated, it is possible to change your articles. With the correct advice, you’ll need to amend the document via a special resolution. The final amended version will then have to be submitted to Companies House within fifteen days of the special resolution being passed.
Overall, though, the upshot is if you’re running a limited company with more than one director, you can probably let sleeping ‘mem and arts’ lie. However, if you’re operating as a sole director, now might be the time to grab your duster and chat with your accountant.
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