A recent court case has found that the Model Articles of Association adopted, in whole or in part, by a lot of private companies do not allow those companies to have a sole director. Any company which was incorporated since October 2009, or which has changed its articles of association since October 2009, needs to review its articles of association and amend them to specifically allow sole directors. Failure to do this will mean that the company cannot act with a sole director and any acts performed by a sole director may be invalid. Even if your company has more than one director at the moment it is important to keep this under review, as you could end up with a sole director if circumstances change or a director passes away.
The Case
In the recent High Court case of Hashmi v Lorimer-Wing [2022] EWHC (Ch) the Court found that the Model Articles require there to be a minimum of two directors under Article 11(2) and that a sole director acting under the Model Articles could not make valid decisions. The case in question involved a counterclaim being made by a company with a sole director and such counterclaim was found to be invalid because the company did not have proper authority to make decisions in relation to the counterclaim.
The Model Articles are the default articles of association which will apply to all limited companies. Companies have the ability to exclude, modify or adopt some of the Model Articles. However, a large majority of companies adopt the standard Model Articles in whole or in part and few companies will exclude them completely. This means that this decision may have ramifications for any company which was incorporated since October 2009 and any company which has changed its articles of association since October 2009. Even companies which have more than one director at the moment may be affected if they are left with a sole director later down the line due to a change in circumstance.
The case revolved around Model Article 11(2) and Model Article 7(2). Model Article 7(2) states that where a company has a sole director, they can take decisions without reference to Articles 7-15 which are considered the decision-making provisions provided no other provision of the articles of association requires the company to have more than one director. Under this ruling, Article 11 has been interpreted to mean there is a requirement to have a minimum of two directors and therefore companies cannot rely on Article 7(2). This is contrary to previous guidance on the subject.
This is a surprising judgment and we understand that this will raise a number of concerns for our sole director clients. To mitigate the risk to companies, we suggest amending the Articles to allow for the following:
- Quorum is one director if there is a sole director but two if there is more than one director; and
- Notwithstanding article 11 or any other provision the company is expressly not required to have more than one director and the minimum number is one.
By making these amendments, it will bring Article 7(2) back into play, meaning sole directors can make decisions without regard to any of the other provisions on directors’ decision making. Companies may also consider seeking shareholder approval for any decisions taken whilst the company only had a sole director in apparent breach of the articles of association.
There are a number of risks to not addressing this judgment - in the recent case of Hashmi v Lorimer-Wing, the company had its counterclaim struck out because the company was found to not have authority to make the necessary decision. Further, it could potentially put companies in breach of banking documents with repeating warranties which could mean loans are called in, and it could potentially mean companies cannot buy or sell, or in fact do anything without shareholder approval. It is clearly an issue that needs to be addressed, and, as above should be considered for all companies but particularly those who already have only one director.
The judgment is very recent, with little further guidance on the impact and practicalities of this decision. Moving forward, when a new company with a sole director is incorporated, the articles will need to be amended to include provisions to specifically allow a sole director to cover any risk to companies with sole directors making invalid decisions.
If any sole director companies need help with ratifying previous decisions, amending their articles of association to allow for a sole director or have any other concerns following this ruling, please contact Lizzie Walters or Joanne Sinclair in our Corporate and Commercial team.