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Hashmi v Lorimer-Wing court case throws up a new issue to consider
In the High Court case Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) it was decided that a sole director acting under the model articles could not make valid decisions.
Background
Under the Companies Act 2006, all companies are required to have articles of association which set out the rules that directors and shareholders must follow when running their companies.
‘Model’ articles of association are the standard default articles a company can use. They are prescribed by The Companies (Model Articles) Regulations 2008.
Alternatively, a company may choose to use tailor-made articles that are specific to that particular company. Article 7 of the model article includes the provision regarding how the directors should make decisions:
(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.
Article 11 (2) provides the quorum for directors’ meetings – 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.
It has long been known that two of the model articles seem to contradict one another; however, it has been widely held that Article 7(2) trumped Article 11(2). This view was supported by the Department for Business, Innovation and Skills’ non-statutory guidance in respect of the Model Articles, which stated that model articles do not provide for minimum number of directors.
The issue
In Hashmi v Lorimer-Wing the company had implemented a bespoke Article 16 which modified Article 11(2) and required a quorum for board meetings of two directors. The decision reached by the judge held that a sole director cannot make board decisions alone on behalf of the company and that the minimum number of directors required for a company to function is two.
It is unclear whether the inclusion of bespoke Article 16 was the persuasive reason in determining that the sole director’s decision was not binding or if the model articles’ own contradiction would have been enough to stop the sole director from acting independently.
The decision in Hashmi v Lorimer-Wing may be appealed, or another case brought that will change the position, but in the meantime it leaves sole directors open to the risk of their decisions being challenged, especially if disputes arise.
Potential solutions
- If the company has historically operated with only one director, it may wish to get retrospective members’ approval.
- The company may amend their article of association to change the quorum to a minimum of one.