Model Articles: Sole director issues and how to solve them

A recent High Court case has brought into question whether sole directors of limited companies are legally allowed to make important decisions relating to their companies, due to deficiencies with the default Model Articles used by millions of limited companies in the UK.

In this blog, we’ll explain what the High Court decision was, why it matters to limited companies with sole directors, the options available to sole directors to resolve the issue with their Model Articles, and more.

Background – Hashmi v Lorimer-Wing

In Hashmi v Lorimer-Wing [2022] EWHC 191, a High Court Judge ruled that a sole director in a limited company that is governed by the Model Articles cannot make board decisions alone on behalf of the company and if a company is operating under the Model Articles, a minimum of two directors are required for board decisions to be legally valid.

The case stemmed from whether the sole director of Fore Fitness Investments Holding Limited, Mr. Lorimer-Wing, was authorised by the Model Articles to bring a counterclaim on behalf of the Company in response to an unfair prejudice claim from Mr. Hashmi, a former director, employee and shareholder of the Company.

The shareholder, Mr. Hashmi, argued that the Model Articles adopted by the Company prescribed that a minimum of two directors were required for a board meeting to be held, as per Model Article 11(2), and that a board decision made by the sole director, Mr. Lorimer-Wing, in relation to the counterclaim, should therefore be annulled.

The High Court agreed with Mr. Hashmi, and referred to the following articles in its decision:

Article 7(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.

Article 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.

Article 11(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.

Article 11(3): If the total number of directors for the time being is less than the quorum required, the directors must not take any action 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.

The Deputy Judge who heard the case ruled that “a provision in the articles requiring there to be at least two directors to constitute a quorum logically is a requirement that the company in question have two directors in order to manage its affairs.” A quorum is the minimum number of people required for the decisions taken at a board meeting to be valid.

The judge ruled that the sole director, Mr. Lorimer-Wing, could not achieve a quorum at the board meeting with himself, in which a counterclaim against Mr. Hashmi was decided to be actioned by Mr. Lorimer-Wing alone. This was because the Model Articles the company adopted required two directors to constitute a quorum. Therefore the decision to initiate a counterclaim against Mr. Hashmi was invalid.

Why is this decision important for sole directors?

Put simply, sole directors of limited companies which have adopted the Model Articles are now potentially unable to make basic management decisions relating to a limited company on their own, as a minimum of two directors are now required to do so.

The decision means that any previous board decision made by a sole director and ratified by a resolution can now be challenged. Also, any future decisions must have at least two directors to make them.

The ramifications of this could be widespread, and already there is talk that some banks which provide business loans are refusing to deal with sole director companies until this discrepancy in a company’s articles of association is rectified. The reason being, that it could be deemed that a sole director is not legally able to enter into a binding contract with the bank due to this new precedent set by the High Court.

The UK is a common law country, which means that the judgment of each court case can bind all subsequent cases, based on the seniority of the court. As this case was seen by the High Court (the third highest court in the UK, by seniority, and the highest court in the UK by seniority that has ruled on the issue of sole director authority), this means that board decisions made by a sole director are now open to being challenged and overturned by citing the decision in Hashmi v Lorimer-Wing as precedent.

Prior to this High Court judgment, it was generally accepted that whilst a discrepancy existed between Model Articles 7(2) and 11(2), Model Article 7(2) overrode Model Article 11(2), and therefore, sole directors could carry out a board resolution for basic management decisions – for example, to:

• change a company’s registered office address
• change the location of the company’s statutory registers
• appoint an accountant; or,
• enter into binding contracts with clients or third parties.

Whilst the wording in the Model Articles have always been confusing, because effectively a sole director was allowed to have a ‘meeting with themselves’, the removal of the requirement for a second director for a meeting to be quorate was one of the many reasons why the Companies Act 2006 was passed into law in the UK – that being, to improve the ease of starting a business in the UK.  Prior to the Companies Act 2006 being passed into law, limited companies were required to have at least 2 directors.

What are the potential issues of this decision for sole director companies?

A number of potential problems arise from this judgment:

• Lenders may require at least two directors to be appointed in a private limited company, to ensure that decisions made by the directors are legally enforceable and valid.
• Sole director/shareholder companies may add shareholders in the future, who may challenge the validity of decisions made by a sole director in the past.
• Current agreements between sole director companies and their lenders or suppliers may be rendered invalid and unenforceable.
• Investors may shy away from a sole director or former sole director company, which previously had decisions made by a sole director.

How to solve sole director issues

If your company has adopted the Model Articles of Association or a modified version of them, don’t worry – there are a number of solutions available to you to ensure your company’s past and future decision-making are not affected by this ruling.

Amend your company’s articles of association

The simplest way for a sole director company to resolve this issue going forward is to amend your company’s articles of association to resolve the conflict between Model Article 7(2) and 11(2).

Where a sole director company has one shareholder, a shareholder resolution to amend the company’s articles of association can be passed at either a general meeting or as a written resolution.

Where a sole director company has more than one shareholder, a special resolution will need to be passed by at least 75% of the shareholders. The limited company must then send the completed resolution to Companies House within 15 days of it being passed. You can use the Giving notice of a special, written or ordinarily resolution form to inform Companies House of a special resolution.

Any amendment to your articles of association should caveat the provisions made in Model Article 11(2) so that for a meeting to be quorate, only one director is required to be present when the company is run by a sole director.

If you don’t feel confident making such an amendment yourself, we offer an Article Amendment Service for just £169.99 +VAT. Please call us on 020 3984 5387 for more information.

Appoint a second human director

One way of preventing issues with future decisions is to appoint another human (‘natural’) director so that meetings can always be quorate in line with Model Article 11(2).

The issue is, of course, that a director is legally responsible for the running of the company. If you are promoting one of your employees to a statutory director role, you should make them aware ofthe legal obligations they will be undertaking, once appointed.

In terms of who you can appoint as a natural company director – you can appoint anyone; however, they:

• must be at least 16 years old
• cannot be an undischarged bankrupt
• cannot be disqualified as a company director

Appoint another limited company as a second director

If you are a one-person company or have no one else to appoint as a second director, another option open to you is to appoint another limited company as a second director.

There is nothing prohibiting you from forming a second limited company, of which you own 100% of the shares and are the sole director, and then appointing this limited company as the corporate director of the first limited company.

If you form a new limited company with us, our articles of association have now been updated to include provisions for companies with a sole director which enable sole directors to make legally valid board decisions on their own, regardless of the Hashmi vs Lorimer-Wing judgment.

• Our All Inclusive Package - the perfect way to form a limited company

You should bear in mind that you will need to file a confirmation statement and dormant company accounts for this second limited company each year, on top of your filing requirements for your first limited company.

Retrospectively ratify sole director decisions

Amending your company’s articles of association or appointing a second director will not change the fact that decisions made prior to these updates are still open to challenge at a later date.

To ratify previously made decisions, the shareholders will need to agree a written resolution that the acts and decisions of the sole director of the company are ratified, notwithstanding that at the time of these decisions, the articles of association of the company required two or more directors to take such acts or make such decisions.

Companies that have two or more directors now, but had a sole director in the past, should also consider ratifying the sole director’s previous decisions.

What about companies limited by guarantee?

Although this case considered the Model Articles for private companies limited by shares, Model Articles for limited by guarantee companies also have similarly ambiguously worded articles to those found in Model Articles 7 and 11. Therefore, it may be prudent for sole director limited by guarantee companies or companies that have had a sole director in the past, to take action to amend their articles and ratify previous sole director decisions.

Are sole shareholder decisions affected by this judgment?

Section 318(1) of the Companies Act 2006 states that “In the case of a company limited by shares or guarantee and having only one member, one qualifying person present at a meeting is a quorum.” There is nothing in the Model Articles that conflicts with this legislation, and therefore sole shareholder decision-making is not affected by this judgment.

The Model articles of association explained

Articles of association are the principal constitutional document of a limited company. They serve as the contract between a company’s shareholders and the company, and a contract between each respective shareholder. Given this document is the backbone of a company’s internal governance, which prescribes director-level decision making and the processes by which directors work on behalf of the shareholders of the company, it is vital that it functions as intended and there are no conflicts between the articles.

The Model articles of association are a standard default set of articles of association prescribed by The Companies (Model Articles) Regulations 2008, which companies can use by default if they do not wish to create their own. If you have a limited company and you did not form your company with a set of bespoke articles drafted by yourself or a qualified professional, your company almost certainly was formed using the Model Articles or ones very similar to them.

Will this decision be overturned?

There is much talk in the legal community that this decision is likely to be overturned at The Court of Appeal or The Supreme Court. It is unclear at present if an appeal of this decision will be made.

In any event, it is important that sole directors act now to rectify their Model articles of association, both by ratifying retrospective decisions and either amending their articles of association or appointing a second director (or both) – as any appeal to this decision could take years to be heard.

So, there you have it

This High Court judgment may have altered the landscape of sole director limited companies forever. If you run a sole director company, now is the time to take steps to ensure both past and future decisions you make about your company remain legally valid.

We hope you found this post helpful. Please leave any questions in the comments section below, and we’ll be happy to help.