Are Sole Directors Authorised to act under their Model Articles?
A recent High Court case has cast doubt on whether a sole director can validly make decisions for a company under their Model Articles. Any company which:
- was incorporated since October 2009; or
- has changed its articles of association since October 2009
and incorporates the Model Articles will need to review its articles of association and amend them to specifically allow sole directors to make decisions for the company. Failure to make these amendments will mean that companies with only one director will not be able to act, and any acts performed by the sole director may be challenged as invalid.
What are Model Articles?
Model Articles are a set of rules which determine how a company is run. For example, the Model Articles set out the process for appointing and removing a director from a company. It is a requirement for all companies to have a set of Articles. Model Articles are readily available and often selected when registering a company at Companies House
The case – Hashmi v Lorimer-Wing [2022]
The case was brought before the High Court when the defendant company (with only one director) tried to bring a counterclaim against a claim brought against them for unfair prejudice.
The Articles in question in the case of Hashmi v Lorimer-Wing are as follows:
- Article 7(2) states that where a company only has one director, no provision of that Article requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the Articles relating to directors’ decision-making;
- Article 11(2) states that 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.
- Article 16 (a Bespoke Article that the company had implemented into their Model Articles) modified Article 11(2) and required a quorum for board meetings of two directors.
It has been thought that Model Article 11(2) did not apply to companies with a sole director because of Model Article 7(2), however, the High Court in this case decided that the wording of Model Article 11(2) does require a company to have two directors.
It is unclear whether the High Court ruled this way due to the Bespoke Article implemented into the company’s Articles. Nevertheless, we now know the decision of Hashmi v Lorimer Wing puts sole director companies at risk.
Potential Solutions and considerations
If you are a sole director of a company and have Articles 7(2) & 11(2) incorporated into your Model Articles, you should contact us to take one of the following actions:
- Adopt new Articles of Association which permit a sole director to act; or
- Appoint a second director
Furthermore, if you are considering incorporating a new company of which you were intending to be a sole director, you should strongly consider incorporating with bespoke articles, which can resolve the issues raised in Hashmi v Lorimer-Wing as well as provide your company with the flexibility it requires.
You may also wish to seek advice on the validity of any historic decisions taken by the sole director of a company and whether such decisions are capable of being ratified.
Please contact the Commercial team on 0115 7270 914.
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