In the High Court case Hashmi v Lorimer-Wing, in early 2022, it was decided that a sole director, acting under the Companies Act 2006 model articles, could not make valid decisions if the director’s meeting was not a quorate meeting.
The impact of this decision could have wide ramifications for many sole director businesses. We’ve heard of companies being unable to sell or buy a property, or take out a loan because effectively the sole director does not have the authority to make the decision.
Such companies should check that they don’t fall foul of a recent judgment, and if they do, consider amending their articles.
Open to challenge
The judgment in the recent case was that (unamended) model article 11(2) amounts to a requirement for a quorum of two directors. So two directors must be present for the meeting to be quorate.
Effectively, this means that a company that uses the model articles must have at least two directors to manage its business and make decisions about the company.
Companies with a sole director using default model articles may be invalid. Decisions taken by sole directors of companies set up with the default model articles may be invalid and could therefore be open to challenge.
What are the articles of association?
Under the Companies Act 2006, all companies are required to have articles of association which set out the rules that directors and shareholders must follow when running their companies.
These are essentially a set of internal rules about how the company will be run. There is a default standard or “model form” for these articles, which is prescribed by the Companies Act. Unless a company is set up with bespoke articles then the model articles apply.
A company’s articles will often contain, among other matters, provisions about minimum and maximum numbers of directors for the company, and the quorum, i.e. the number of directors required to be present at a meeting for the proceedings at the meeting to be valid.
All of my firm’s limited current company clients, i.e. your company, were formed in accordance with Companies Act 2006, rather than the earlier Companies Act 1985.
The background to this case
Article 7 of the model article includes the provision regarding how the directors should make decisions:
(1) the general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8
(2) 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.
Article 11 (2) provides the quorum for directors’ meetings i.e. 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.
It has long been known that two of the model articles seem to contradict one another; however, it has been widely held that Article 7(2) trumped Article 11(2). This view was supported by the Department for Business, Innovation and Skills' non-statutory guidance in respect of the Model Articles, which stated that model articles do not provide for minimum number of directors.
The decision in Hashmi v Lorimer-Wing may be appealed, or another case brought that will change the position, but in the meantime, it leaves sole directors open to the risk of their decisions being challenged, especially if disputes arise.
Potential solutions
Under the Companies Act 2006, a company can amend its articles. If a private company wants to have a sole director it may do so, but will need to have modified articles, or at least to amend these provisions of the model articles.
Some choices open to sole directors are as follows.
If the company has historically operated with only one director, it may wish to get retrospective members’ approval.
the company may amend its article of association to change the quorum to a minimum of one.
add a blanket clause that has the effect of disapplying all the articles which refer to a quorum, in the case of the sole director.
appoint another director to the business, though both the directors would need to approve all future (and previous) decisions made by the company.
Take action now
Depending on the nature of any amendments or the complexity of the matters involved, you may wish to approach a specialist corporate law solicitor for further advice and guidance.
It should not be overly difficult for an accountant to prepare and submit revised articles of association for your company and minutes of a shareholders’ meeting which takes account of one or more of the suggested choices mentioned above or any other amendments when updating the default articles of association for minor matters.
It is also worth checking your company's articles to see what would be the effect of the sole director-shareholder dying. The shareholders appoint the directors who run and manage the company. e.g. winding up the company and closing the bank account after their death. If the sole shareholder is not around, and there are no directors, then the beneficiaries of the sole shareholder-director are in a legal stalemate.