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Sole Directors – Time to check your Articles of Association?

The decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has suggested that amendments are required to the Model Articles for private companies limited by shares to allow decision-making by sole directors.  

What are the circumstances of the case and who were the parties involved?

Fore Fitness Investments Holdings Limited (the “Company”), was incorporated with unamended Model Articles in 2019 and Mr Lorimer-Wing (“Mr L-W”) was appointed as sole director. In March 2020,  Mr Hashmi and Mr Gilbert were appointed as directors, with Mr Hashmi also participating as an investor in a fundraising for the Company. As part of the fundraising, an investment agreement was entered into and new articles of association were adopted by the Company.

By mid-June 2021, Mr L-W was the sole director of the Company again and continued to act as sole director. The proceedings in the case stemmed from Mr Hashmi’s unfair prejudice petition in August 2021 seeking an order that Mr L-W purchase his shares in the Company. The Company and Mr L-W then served a defence, based on the Company’s articles of association, and counterclaim, in September 2021. The matter before the Court was whether Mr L-W acted lawfully pursuant to the Company’s articles of association in his ability to bring a claim with the appointment of only one director.

Which provisions in the Articles were analysed?

The High Court looked in particular at Articles 7, 11 and 16. Articles 7 and 11 were derived from the Model Articles and stated the following:

"7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If—

(a) the company only has one director, and

(b) no provision of the articles 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.

and

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."

Model Article 7(2) states that where there is only one director, they can make decisions so long as no other article provision requires the company to have more than director. Model Article 11(2), according to the interpretation in this case, states that the quorum for a board meeting must be at least two directors. However, the general understanding of Model Article 11(2) prior to this case was that Model Article 11(2) wasn’t stipulating a requirement for a company to have at least two directors to be quorate, rather just what the quorum should be if there is more than one director.

Whilst keeping Articles 7 and 11, the new articles also included a new, bespoke, Article 16. This modified Model Article 11, and required that the quorum for a board meeting must be two directors.

Why was there a conflict with the Model Articles?

The inclusion of the bespoke Article 16, requiring a quorum of at least two directors, reinforced Model Article 11(2), but this in turn disapplied Model Article 7(2) that permits decisions to be made by a sole director. It was stated in the judgement that “Model Article 7(2) is… clear. It permits for a sole director to manage the company, but only in circumstances where no provision of the articles requires the company to have more than one director. Here, Bespoke Article 16.1 does require there to be multiple directors in order for board meetings to be quorate.”

What was the outcome of the case?

Due to the bespoke Article 16 requiring a minimum of two directors in decision-making and Model Article 7(2) being effectively disapplied and not permitted to prevail over Model Article 11(2), It was held that Mr L-W was acting his outside his powers as sole director in bringing the counterclaim and it was struck out. It was noted that there is “no industry-wide consensus” on the relationship between Model Article 7(2) and Model Article 11(2) and that the Model Articles should be amended to permit one director to run a company and make decisions, by deleting Model Article 11(2).

How is the outcome of this case going to affect me as a sole director?

If you are the sole director of your company, then it would be prudent to amend your articles of association to amend Article 11(2), or insert a bespoke article, that states that where there is only one director, then the quorum for a meeting shall be one. You could also state specifically in the articles of association that the minimum number of directors required is one, and that there is no maximum number (unless of course you wish to impose a maximum number depending on future growth).

Does the outcome of this case have any other implications?

If you are the sole director of a company, but have a different shareholder(s) and have been running the company without any amends to the Model Articles up to now, then there is likely to be less risk if you have not received any resistance from the shareholder(s) or otherwise and thus consider that Model Article 11(2) is not relevant to your company. However, if you have had more than one director at any point since incorporation and have different shareholders and you have unamended Model Articles, then there is much greater risk that given the decision in this case, that when there is only one director, they are acting outside of their powers and are making unlawful decisions.

This may also arise as an issue during due diligence if the sole director decides to sell the shares in the company. The buyer may seek protection in the sale and purchase documentation by way of an indemnity (recovery on a pound-for-pound basis) to ensure they do not incur liability for any previous decisions made by a sole director without bespoke articles.

This article was written by Holly Lawrence, Corporate PSL, and Lucia Ferrara, Paralegal.

If you would like any further advice or assistance on the implications of this case or amending your company’s articles of association, please contact a member of our Corporate team.

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