DBFAndyMcNish

Andy McNish is a Partner in our Corporate and Commercial department.

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.

articles of association

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 manchester@dbf-law.co.uk.

Found this article useful? You might be interested in some of our others:

Testimonials

Read what our clients have to say...

View All

Excellent experience start to finish – always very responsive to any queries and the turnaround on the property I was buying was very quick, even in the busy time leading up to stamp duty deadline. Jenny was always very helpful and went above and beyond to close on a short timescale.

Ben Armitage

“Very approachable, practical solutions to problems, but most of all very responsive which I personally think is very important because if you need help, you need it quickly, or at least to know someone is looking at it for you”.

Joanne Rowe, Finance Director, Greater Manchester Chamber

“Always able to contact, very approachable, friendly and professional”

Nives Feely, JAM Recruitment

“I believe I have been able to establish a professional working relationship with everyone I have come into contact. Importantly, I sense the relationships which have been established give me the confidence that I can make contact with Davis Blank Furniss at any time and on any matter. I would also like to express my thanks to the very impressive “gatekeepers” who work in reception, not only for making me very welcome, but also for their professionalism”

Bill Pryke, CEO, Chartered Institution of Civil Engineering Surveyors

“Thank you for your efficient and friendly help throughout this process. We have had it easy but your approach has been part of that”.

Robert Amsbury (Conveyancing Client)

“I would like to take this opportunity to thank you personally for the ongoing support and assistance the firm has offered to our parents over the years. I hope also that we may be able to call on you if necessary in the future.”

Valerie Fisher (Probate Client)

“Jo always provides great service, understands our needs and delivers on her promises. Our needs are relatively simple but the complexity arises out of the volume of work and short time frames, Jo always delivers.”

Peter Fernandez, Corporate Director at Royal Bank of Scotland

“A big thank you to all who dealt with my wife’s claim… We would not hesitate to recommend Davis Blank Furniss to anyone that may be in a situation like we have been…”

Anon (Personal Injury client)

“Before putting my case in Kirsty (Morbey)’s capable hands I’ve met a couple of other solicitors. None of them listen to me as intently as Kirsty and showed me as much empathy and understanding as she did. Simultaneously she was able to look at my case from legal perspective, explain all the options and follow each of our meetings with written summary of the discussed matters (in timely manner). Her advice was invaluable and led me to successfully ending the case matter (hopeful for good). I’m forever grateful for he work and would definitely recommend her to anyone looking for reliable, knowledgeable and committed solicitor”.

Anon (Family client)
5 star service

Our Manchester office is rated 5 stars on Google