For breweries that are set up with a sole director and model articles, it would be prudent to amend the articles as a priority.
This ensures that the decisions of the director running the business, both moving forward and previously, cannot be open to challenge and the founders might even want to use the opportunity to make wholesale changes to the articles to introduce specific director or shareholder rights.
The vast majority of breweries will either be set-up from the outset as a private company limited by shares or will become incorporated i.e., convert from a sole trader status into a corporate entity, as they grow and the benefits of a corporate structure become apparent.
A key benefit of becoming a company will be that the business will have its own legal status meaning it can enter into contracts (such as supply and distribution agreements), employ staff, acquire leasehold or freehold property and borrow money/take on third party investment all in its own name.
Crucially for the founders/shareholders, if the brewery runs into hard times and unfortunately has to close, their financial exposure is limited to any amount they had agreed to pay for their shares that has not yet been paid, which might well be £1 per share.
If the brewery were instead being run as a sole tradership, in an insolvency situation the founder would instead likely be liable to fulfil all of the business’ financial commitments such as paying-up the unexpired term on a lease, paying notice periods for staff, repaying loan amounts outstanding etc which could well cause personal bankruptcy.
Therefore, there are some clear merits of running the brewery through a company structure but it is important to ensure that the company has the right constitution to meet the founder’s requirements and quite possibly, the intentions for the business moving forward, otherwise the brewery might well run into legal difficulties further down the line.
Sole Director and Model Articles
The articles of association are effectively the rules agreed by the shareholders of the company to document how the company will be governed moving forward and typically cover matters such as who can be directors, when board meetings should be held, how board matters will be voted upon and also the rights attaching to the shares. Many companies (including breweries) opted to use the “model articles” on incorporation and only have one active director registered at Companies House i.e., the sole director.
The model articles are a template set of articles that were included in the Companies Act 2006 and whilst basic and unlikely to be suitable for companies with multiple shareholders, were generally designed to be functional for newly incorporated companies that did not require anything overly prescriptive or complicated. However, the 2022 High Court case of Hashmi v Lorimer-Wing has seriously undermined the suitability of the model articles for a sole director company.
As a very brief summary, model article 7.2 provides that “if (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”
Legal practitioners (and accountants who often set-up companies for clients) had always operated on the understanding that model article 7.2 took precedence over model articles 11.1 and 11.2 which provide as follows:
1. The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
2. If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision:
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.
However, the High Court ruled that model article 11 served as an explicit caveat to model article 7.2 meaning a company set-up with model articles which had a sole director could only hold a quorate meeting (i.e., a legally valid board meeting at which business can be voted on) for the purposes of appointing further directors or calling a shareholder meeting for the shareholders to appoint further directors.
In the case in question, the sole director company was being sued and sought to bring a counterclaim – the claimant argued the company had no authority to bring such a counterclaim as there could have been no valid board decision to approve such action. The judge interpreted model article 11 as expressly superseding 7.2 and on that basis the counterclaim was struck out.
Breweries with a sole director and model articles, therefore, need to consider either appointing a second director or ideally, amending their articles to resolve the issue definitively.
The above begs the question which matters ought to be decided by “board meeting”, notwithstanding that the notion of a “meeting” of the board when there is only one director is somewhat farcical to lawyers and laypersons alike.
As a loose guide, any and all-important decisions, such as entering into long-term or significant contracts, embarking on litigation, taking on investment, borrowing monies, purchasing property etc, would ideally be approved by the board of directors and often the party on the other side of the arrangement will ask for sight of the board minutes documenting the decision.
Breweries with a sole director and model articles, therefore, need to consider either appointing a second director (which might not be ideal if there is not an obvious person to take on the role and does not fully resolve the issue as it will reoccur if that director subsequently leaves) or ideally, amending their articles to resolve the issue definitively.
Furthermore, as an unwelcome knock-on effect of the Hashmi ruling, there is a risk that important decisions taken by the brewery previously could be open to challenge. For instance, if a supplier or landlord wanted out of their contract or lease with the brewery, they might look to argue that the brewery never had the proper authority to enter into the agreement.
Whilst the writer hopes that the court would strike through such a claim for being a sham excuse to renege on the agreement for whatever reason, clearly no business owner wants to become embroiled in litigation that could have been avoided. Therefore, as part of the arrangements to amend the articles we would always suggest that the founder/shareholders sign a resolution to ratify any previous decisions of the sole director which effectively covers off this risk.
Conclusion
For breweries set-up with a sole director and model articles, it would be prudent to amend the articles as a priority to ensure that the decisions of the director running the business, both moving forward and previously, cannot be open to challenge and the founders might even want to use the opportunity to make wholesale changes to the articles to introduce specific director or shareholder rights.
This article originally appeared in Brewer's Journal.
