A recent case shows how a company’s Articles of Association, a document which defines the duties and responsibilities of members, must be adhered to when directors are exercising their powers.
The court had to consider whether a sole director of a company, whose articles required two directors for its board meeting to be quorate, could validly pass a resolution to appoint administrators under the Insolvency Act 1986 and, if not, whether the Duomatic principle could validate the appointment.
As an additional consideration, 75% of the shares in the company were held by the sole director and the remaining 25% by a dissolved company incorporated in the Isle of Man meaning that a shareholder resolution could not be approved by the dissolved company.
The court decided that statutory powers must be exercised in accordance with the Company’s Articles of Association.
As the Articles did not permit a decision to be made by a sole director, a resolution passed by him was not valid.
The Duomatic principle could also not be used to validate the decision as it requires all shareholders to give informed consent, which the Isle of Man based company had not given. The Duomatic principal is not a “sticking plaster” for invalid director’s decisions.
This case is a reminder to companies to ensure their Articles of Association adequately reflect how the company operates and makes decisions.