Sep 2022
The recent High Court judgement in Hashmi v Lorimer-Wing has cast doubt over the effectiveness of decisions made where limited companies have a single director.
What happened?
The case concerned Hashmi and his colleague Lorimer-Wing. Hashmi was a shareholder and director of the company. He was removed as a director following disagreements between them.
Subsequently, Hashmi raised an unfair prejudice petition under section 994 of the Companies Act 2006. When the other remaining director resigned shortly afterwards, Lorimer-Wing was left as the sole director in office. Lorimer-Wing filed a defence and a counterclaim for breach of directors' duties.
Hashmi made an application to strike out the counterclaim on the basis that Lorimer-Wing lacked the appropriate authority to bring the counterclaim. The Court granted the application and struck out the counterclaim.
What are Model Articles?
It’s neither illegal nor unusual for a company to have just one director. In fact, things such as the Model Articles exist as default articles of association for private limited companies, so that they can have the freedom to choose whether they would like to adopt, alter or exclude some or all of the Model Articles.
In Article 7(2) of the Model Articles, it states: “If a company only has one director, and no provision of the articles requires it to have more than one director… the director may take decisions’.
The only difficulty is that Article 11 states there ‘must never be less than two, and unless otherwise fixed, it is two’ when holding a directors’ meeting. However, it doesn’t state a required minimum number.
What does this mean for sole director companies?
The case of Hashmi v Lorimer-Wing has highlighted inconsistencies with the Model Articles for private companies with sole directors. Consequently, decisions made by sole directors could be at risk of not being able to make decisions lawfully.
In Court, the company’s Articles under consideration were a combination of the Model Articles and tailored articles, which set the requirement for directors’ meetings at two – the same as the Model Articles.
The court ruled that Model Article 7(2) only permitted a sole director to make decisions for the company if there are no other provisions within the articles that require more than one director. When the quorum for directors’ meetings is set at two, then two directors must make decisions for the company.
To prevent decisions being challenged, and complications arising in the future, it might be prudent for companies with sole directors to consider the following options:
a) to appoint another director; or
b) to amend the articles of association to allow decisions to be made by a sole director; or
c) both (a) and (b).
Companies may also need to ratify decisions made by a sole director as the options above will not necessarily prevent previous decisions from being challenged. A written resolution will need to be passed by the shareholders.
If you have any questions, or would like any guidance on the above and in particular the documentation required to protect your business, please contact Downs Solicitors LLP for more information.
