Model Articles | when you're on your own

If you're the only Director of your LTD company, and you've adopted Companies House's model articles (which let's face it, everyone has) you need to read this. A clever legal brain has found a loop hole in the articles, which we suspect HMRC may pounce on!

This all came out of a recent legal case, Hashmi v Lorimer-Wing, which looked at the Directors' duties section of the Model Articles and in the end, the whole argument was settled at the High Court.

Model Articles?

Every LTD company must have articles - a legal document containing the standard default provisions that regulate how a company is run and the internal rules and regulations that must be followed by a company's shareholders and directors.

These articles would need to be drawn up by a solicitor but to save time and money, Companies House issues their own standard version which it allows LTD's to use. These are referred to as the 'model articles' and the vast majority of SME companies use them.

So what's the issue?

Section 7(2) of the Model Articles permit a sole director to make decisions for the company BUT only if there are no other provisions within the rest of the articles that require more than one director.

But here's the crux:

Section 11 of the articles looks at the minimum number of Directors you need to pass any decisions (like awarding salaries to Directors or proposing a dividend payment).

And this section states that you need at least two Directors to be quorate.

In other words, you need at least two Directors to agree on any decisions. And if there's only one of you, that's impossible.

Risk?

HMRC could use this loophole to question decisions you've made.

One that springs to mind is where you've paid a dividend because you may have proposed and agreed this as a Director's decision.

What to do?

Companies with only one director using the Model Articles should consider taking legal advice. Options being:

• You may wish to appoint (and retain) an additional director or,

• Amend your Articles.

You may also wish to ratify past decisions made by the sole director.