High court ruling has implications for sole directors
The recent judgement from the case of Hashmi v Lorimer-Wing (2022) has caused potential implications for Limited companies with a single director that have adopted the model Articles of Association (Model Articles).
The case concerned a limited company (Fore Fitness Investments Holdings Limited) that had two directors who were also shareholders. One of the directors, Hashmi, was dismissed as a director of the company by the other director, Lorimer Wing, following a disagreement between them.
Lorimer Wing considered Hashmi to be a ‘Bad Leaver’ in accordance with their Articles of Association and Hashmi subsequently raised an unfair prejudice petition under section 994 of the Companies Act 2006. Lorimer Wing, as the sole director acting on behalf of the Company, served a counterclaim against Hashmi for breach of directors’ duties.
Hashmi argued that this counterclaim should be struck out on the basis that, under the provisions of the Model Articles, a sole director would not have the requisite authority. The court considered the following two Articles:
- Model Article 7(2)
Which allows a sole director to make decisions on behalf of the company provided that there are no other provisions in the articles for the company to have more than one director; and
- Model Article 11(2)
Which sets the quorum for a meeting of the directors at not less than two directors.
The court considered that Article 7(2) would only apply to Lorimer Wing (to act as a sole director) if Article 11(2) was removed or did not provide that a quorum must be made up of two directors.
As the company had adopted these articles, article 11 did apply and as Lorimer Wing was the sole director, he could not form a quorum. Therefore, he could not give his authority for the company to bring a counterclaim.
What types of companies does this decision effect?
If you are a limited company with a sole director that has adopted the Model Articles, or a bespoke set of Articles that include the model articles for Article 7 and 11, then any decisions that you have made as a sole director may be invalid.
What are your options?
1. A sole director may rely on Model Article 11(3) to appoint at least one additional director to the board. This would satisfy the quorum set out in Model Article 11(2); or
2. Sole directors with Model Articles (or similar) could amend the company’s articles to disapply Model Article 11(2) and allowing for a sole director to make company decisions alone; or
3. Wait. It is understood this decision is awaiting appeal so this position may be subject to change, or the Model Articles could be amended. The worry with waiting is that this judgement remains the current legal position and either a change in the law or a further judgement may take a considerable amount of time.
It is therefore crucial that limited companies with a sole director act quickly to ensure steps are taken to ensure the company is acting lawfully and any previous decisions of the company seek retrospective member approve to prevent any previous decisions of the company being challenged.
How can Wolferstans help?
The Wolferstans Corporate team are offering a Free Articles of Association Review for any limited company with a sole director. We would be happy to provide you with advice for what is best for your company. If you would like a free review, please contact Jack Harvey on 01752 292384 or firstname.lastname@example.org.