- The 2022 Hashmi vs Lorimer-Wing High Court Case has brought to light the legality of sole director decisions due to inconsistencies within the Model Articles for Private Companies.
- Sole Director companies with Model Articles must ensure they take the necessary steps to keep their business legally valid and mitigate any risks.
- Amending Model Article 11(2) is the easiest way of allowing sole directors to form a quorum and continue to make decisions.
Since the Companies Act 2006 came into action, Model Article 7(2) has taken precedence over Model Article 11(2) and has allowed sole directors of private companies to make unanimous decisions, despite quorum requirements for their boards being fixed at two. However, the recent ruling from the 2022 Hashmi vs Lorimer-Wing High Court case has shifted the trajectory of sole director decision-making and pushed the validity of their judgements into the spotlight.
The case itself developed when Mr. Hashmi, a former director and shareholder of Fore Fitness Investments Holding Limited, made an unfair prejudice claim which was then countered by Mr. Lorimer-Wing, the sole director. Mr. Hashmi believed that the counterclaim by Mr. Lorimer-Wing was invalid since Model Article 11(2) − with the inclusion of a bespoke Article 16 which modified Model Article 11 and required that the quorum for a board meeting was at least two directors − meant that a minimum of two directors were required to make a decision at a board meeting. The High Court Judge ruled in favour of Mr. Hashmi and from then on, sole director board decisions were open to challenge.
As sole director companies continue to navigate the repercussions of the ruling, this article reviews the associated risks and recommends good practice steps to ensure the protection of these businesses and their stakeholders.
Even without the recent case, having a sole director is a general risk if that director then dies or becomes ill or unavailable for any reason, as this could lead to an inability to approve release of funds or take other key actions required to operate the business.
Risks and actions for sole director companies to consider
While we wait to see the impact of the Hashmi vs Lorimer-Wing High Court case, it is important for sole director companies to act quickly and identify any emerging risks.
Amend your company’s articles of association.
For many companies, the simplest option would be to allow sole directors to form a quorum by amending Model Article 11(2) via a shareholder resolution. When making the amendment, it is important to note that boards should consider ratifying both the present and retrospective decisions of the sole director if any of their judgments are, of have been, a cause of concern. This action would not only resolve the clash between Model Article 7(2) and 11(2), but also ensure the legitimacy of past and future decisions. Making this update may present a good opportunity to update the articles generally if the company has articles under a previous Companies Act; companies may consider adopting the Model Articles under the 2006 Companies Act with amendments as required.
Ensure your company has a minimum of two directors appointed.
Having several directors allows the board to distribute decision-making evenly and keep the company running if something were to happen to one director. The resolutions passed will also reflect a range of opinions, reducing opposition and the possible ‘silo’ effect if all judgments were at the hands of a single individual.
An alternative option could be to appoint a limited company as an additional ‘corporate director’. However, there is a downside to this option as directors would need to meet double the filing requirements, therefore increasing the compliance burden.
Review the use of your company
With many sole director companies under more scrutiny due to the ruling, it is a good time to assess whether the businesses themselves are needed, particularly in group subsidiary structures. Are they meeting their purpose? Are they functional? Questions such as these are all fundamental in deciding whether a business continues to trade.
Dormant sole director companies should also be reviewed. Thus, by reviewing its status, it may be more sensible to strike the company off rather than it take on liabilities that may not necessarily align with its long-term goals.
Finally, groups of subsidiaries should also consider the impact where there are single director companies in the group which may then act as sole shareholders of other single director companies.
Conclusion
It is clear that the Hashmi vs Lorimer-Wing High Court case has altered the prospects surrounding sole director companies with Model Articles. The ruling is being used as a precedent in succeeding cases to protect the legitimacy of board decisions, and it is more imperative than ever that sole director companies make the conscious effort to reduce all the associated risks.
The current Model Article 11 currently reads as follows:
‘Quorum for directors’ meetings
11. (1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
(2) 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.
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision—
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.’