When is a Director not a Director?

…Inspect your Articles

Wilson Browne Solicitors take a closer look at the curious case of The Sherlock Holmes International Society v Aidiniantz.

The High Court last month reached a judgment in the case of The Sherlock Holmes International Society v Aidiniantz [2016] EWHC 1076 (Ch).  The judgment raises a number of important points for company directors.
The case concerned a company, The Sherlock Holmes International Society Ltd, which ran the Sherlock Holmes Museum in Baker Street, London.
It involved a family dispute between John Aidiniantz on one side, and on the other, his three half-siblings, Linda Riley, Jennifer Decoteau and Stephen Riley, over who owns takings from the museum and gift shop. Their mother, Grace, was also involved in the dispute before her death.
There were allegations about the misappropriation of these takings and various proceedings followed.
The company’s only members since incorporation were Mr Aidiniantz and Grace, whose death left Mr Aidiniantz as the sole member. The only director of the company recorded at Companies House was Mr Riley.
On 1 July 2014, Mr Aidiniantz presented a petition to wind-up the company on the ground of insolvency. The company, supported by the Riley siblings, opposed the winding-up petition.  Mr Riley instructed solicitors to oppose the petition and to pursue a related claim against Mr Aidiniantz.
The Registrar of Companies made a winding-up order in respect of the company. They appealed, allegedly on Mr Riley’s authority as a director.  Mr Aidiniantz then applied for a declaration that the company had not authorised the appeal and that the appeal should be dismissed.
The issue for the High Court was whether Mr Riley had been properly appointed and subsequently properly removed from office as a director of the company; and whether, therefore, he was capable of authorising the appeal and to instruct solicitors to act.
The company’s articles of association expressly stated that:

• the company shall hold a general meeting in every calendar year as its annual general meeting;
• the minimum number of directors was one;
• the board may appoint any shareholder of the company as a director and that any such shareholder would remain in office only until the next annual general meeting; and
• only persons who are shareholders of the company shall be eligible to be a director.

Mr Aidiniantz raised three main arguments. First, he argued that Mr Riley was not a member of the company and so was not qualified to be a director.  Secondly, he claimed that since Mr Riley had been “appointed” by a single director, the board had been inquorate and the appointment was therefore invalid.  Thirdly, he contended that, under the company’s articles of association, a director appointed by the board only remained in office until the last date on which the next annual general meeting could be held, namely 31 December 2014.
In reply, the company argued that the articles of association had been amended by an informal agreement to be inferred from the conduct of the members, to allow the appointment of any person as a director. The company also contended that the minimum number of directors was one and that the articles of association should be read to mean that, where there was only one director, the quorum was one.
The deputy judge considered the relevant companies law, being section 9 of the Companies Act 1985, which was in force until 30 September 2009 and section 21(1) of the Companies Act 2006, which states that a company may change its articles of association by special resolution.
However, the deputy judge concluded that articles of association are a ‘species of contract’ between the company and its members. As such, articles of association can be amended by agreement and that agreement can be reached informally.  The deputy judge noted that, at law, agreements can be inferred from conduct and concluded further that there was no reason why that principle cannot apply to an agreement to amend the constitution of a company.
Having then considered the conduct of the company’s members, the deputy judge found that the members intended that the articles of association be amended to allow persons to serve as directors without becoming members.
On the issue of quorum, the deputy judge found that the articles of association could be read so that one director can be a quorum for the purpose of taking a decision where there is a single director.
Mr Riley, therefore, had been properly appointed as a director of the company.
Nevertheless, since the articles of association stated that a director only held office until the next annual general meeting, Mr Riley was deemed to have left office on the last possible date upon which the annual general meeting could be held, whether such an annual general meeting was held or not.
Mr Riley had ceased to be a director of the company on 31 December 2014 and the appeal, therefore, was dismissed.
Our opinion
The judgment provides a reminder that, in certain circumstances, an informal agreement to amend a company’s articles of association can be inferred from the members’ conduct.
The judgment also serves to highlight that extreme care should be taken in drafting articles of association, particularly in respect of provisions dealing with quorum requirements for board meetings and provisions dealing with the appointment of a director for a fixed period of time, such as until the next annual general meeting.
If the construction of these provisions is not clear, the wording may lead to unintended interpretations with undesirable consequences.
Directors are encouraged to inspect closely their articles of association to detect any evidence of mystery wording or disguised drafting.
Do you need to conduct further investigations?
If you would like advice on your articles of association, please contact Andrew Kerr or Matt Ward in the Corporate and Commercial Team at Wilson Browne Solicitors.