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This piece was co-authored by Sarah Taylor.
Following the recent judgment in Hashmi v Lorimer-Wing, significant changes have been made to the way in which sole directors can make decisions on behalf of a company.
This note is a must-read for any sole director of an existing company, or an individual or entity that plans to form a new company that incorporates the Model Articles for private companies limited by shares.
Your Articles of Association
All decisions made on behalf of a company must be made in accordance with that company’s Articles of Association. The Articles of Association are, in essence, a company’s ‘rulebook’. Many companies choose to adopt, in part or in whole, the Model Articles for Limited Companies when they are incorporated.
Unfortunately for companies that only have 1 director, the Model Articles have been notoriously unclear when it comes to directors’ decision-making. Model Article 7(2) states that if a company only has 1 director, the sole director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making. By contrast, Model Article 11(2) states that the quorum for directors’ meetings must never be less than 2.
This conflict has resulted in a grey area for sole directors when it comes to decision making. For the sake of practicality, it has been generally understood that Article 7(2) ‘overrides’ Article 11(2) – and as such, sole directors are free to hold board meetings and make decisions. However, the recent case of Hashmi v Lorimer-Wing has changed this.
Hashmi v Lorimer-Wing
Mr Hashmi was a director and shareholder of a company that had adopted the Model Articles. Following a number of disputes, his fellow director, Mr Lorimer-Wing, removed Mr Hashmi as a director. Mr Hashmi raised an unfair prejudice claim against Mr Lorimer-Wing. Mr Lorimer-Wing then passed a directors’ resolution at a board meeting to bring a counterclaim on behalf of the company. Mr Hashmi argued that Mr Lorimer-Wing was not permitted to do this, because (having removed Mr Hashmi) the board meeting was not quorate. Surprisingly, the High Court agreed with Mr Hashmi, and determined that decisions cannot be properly made at a board meeting unless a quorum of 2 directors is present.
The decision has created a number of problems for companies with sole directors. Any future decision made without a quorum of 2 may be subject to challenge, and invalidated. Furthermore, any past decision made by the sole director may also be declared invalid.
What needs to be done?
Following Hashmi, it is important for sole directors to check their Articles. If Model Article 11(2) is in force, they will need to take action to avoid any future or past decisions being challenged or invalidated. Anyone that plans to form a new company with a sole director must also ensure that Model Article 11(2) will not pose any problems.
The most obvious way to do this is for a company to appoint a second director, thus ensuring that a quorum is always present. However, this may not be appropriate for some companies, especially smaller companies that are in practice run by an individual.
Alternatively, a company with a sole director can also pass a written resolution to disapply Model Article 11(2) from their Articles of Association. This will allow a quorum of 1 director to hold board meetings and make decisions.
For those who plan to form a new company, Model Article 11(2) can be expressly disapplied from the company’s Articles of Association when it is incorporated. This will prevent the issue of an insufficient quorum from ever rising. Alternatively, 2 directors can be appointed.
It may also be sensible for sole directors to consider any previous decisions passed where a quorum of 2 was not present. For some companies, this may be every decision ever made at board level. These decisions can be ‘ratified’ by a written resolution or board meeting. However, remember – if a board meeting is called to do this, the sole director must have taken 1 of the 2 steps above to ensure that a quorum is present, and the decision to ratify can itself be validly made.
Legal advice for sole directors
If you are a sole director of a company, and need legal advice regarding your position, our Corporate and Commercial solicitors in Manchester & Glossop would be happy to help. Please call our office on 0161 832 3304, or email firstname.lastname@example.org.
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