A legal horror story in Company Decision making and Written Resolutions

This is a legal horror story arising from what might seem unimportant and run-of-the-mill paperwork, but when not executed accurately, can lead to disastrous consequences for a business.

During the life of a private limited company, directors and shareholders make decisions which they believe are necessary to guarantee the success of the business. Written resolutions are a common method of making decisions, often favoured by shareholders as they are quick and convenient. However, successfully passing a written resolution requires directors to follow strict procedural requirements imposed by the Companies Act 2006.

A written resolution is passed once the shareholders representing the required percentage of voting rights have signed and dated it. However, prior to a circulation of a written resolution, the board of directors must give the resolution due consideration and approve its circulation to members. This is a formality that must not be overlooked, because otherwise the resolution can be rendered invalid. This happened in the recent case of Sprout Land Holdings Ltd (In administration) [2019] EWHC 806(Ch), where disaster struck when the directors failed to deal with the legal procedures correctly.

In this case, the written resolution concerned the appointment of one of the three company shareholders as a company director. The resolution was circulated by one of the existing company directors acting alone, who first circulated it to two shareholders, and then to the third shareholder after the first two shareholders gave their approval. As a consequence of the director’s appointment, the board was able to pass a resolution to appoint company administrators.

The High Court held that the resolution was invalid for two reasons:

1. Firstly, prior to the circulation of the resolution, the directors of the company failed to give the resolution due consideration, as required by section 292 of the Companies Act 2006. Additionally, they also failed to resolve to consider and circulate the resolution before it was circulated.
2. Secondly, there was non-compliance with section 293 of the Companies Act 2006 which required that the resolution be circulated to all shareholders of the company at the same time.

As a consequence of the court’s judgment, the written resolution was rendered invalid. So too was the director appointment. Also found to be invalid was the consequent appointment of administrators by the board.

This case shows that whilst written resolutions are a popular method of decision-making amongst directors and shareholders, it is very easy to overlook the basic statutory requirements of the Companies Act 2006. The consequences can be far-reaching and dramatic.

While this article focusses on the written resolution regime, it is important to remember that both board meetings and general meetings also require compliance with strict company law procedures. Certain business transactions also attract their own company procedure requirements which must be strictly followed to ensure validity.

For advice on how your company can avoid pitfalls when using written resolutions, contact our business law experts.