Articles of Association

Directors in and out of the shadows  -  the problem with old articles of association

Company law recognises that people do not always operate by the book. In the case of appointment of directors, they should be appointed in accordance with the Articles of Association. This means that usually either the shareholders must appoint them, or the other directors must. The appointments must then be recorded at Companies House. But what happens when this has not been done or when appointments have lapsed?

As was the case for previous statutory versions of articles, the Model Articles of Association, which were implemented following the Companies Act 2006, apply default articles to companies which do not adopt other articles. Under the Model Articles either the shareholders or the directors can appoint additional directors.

Before the Model Articles were introduced, earlier versions of the statutory default articles provided for retirement of one third of the directors by rotation each year. They were eligible for re-election by the shareholders. Companies which ignored this could be left with no directors validly appointed, since all would be have been automatically retired. Those people operating as directors would be de facto directors, although as an exception to the above, they would still be (erroneously) recorded as directors at Companies House.

Fortunately, the earlier statutory articles also provided that the acts of such directors were not invalidated by a defect in their appointment.

However, this “get out” only applies to validate acts where the defect is discovered afterwards. Once it comes to light, the company – and the individual directors – will be unable to rely on it. The solution is for the shareholders to pass a resolution validating the previous acts of the board and individual directors where they have acted in the ordinary course of the company’s business. A general, blanket validation may operate to excuse a director from any wrongdoing committed by him. 

The company will also need to regularise the appointment of the directors for the future and possibly change the company’s articles.

A point for de facto directors to consider is that the indemnity permitted under the statutory articles only covers directors or former directors: it does not apply to those who are not appointed. Any Directors & Officers liability insurance policy is also likely to be restricted to named individuals who are valid directors.

Similarly, shadow directors, who “hide in the shadows” and do not go by the name of “director” will not be able to take advantage of any indemnity available under the articles and are unlikely to be able to benefit from D & O insurance.