The recent High Court decision in Hashmi v Lorimer-Wing [2022] has significant implications for all companies currently using the model articles of association where there is only one director.
Articles of association
All companies have articles of association governing the running of the company and, for the most part, those involved probably forget they are even there. These articles of association can be bespoke or utilise a form provided by company law. The latest such form is known as the model articles.
Many companies are set up every year using the model articles. The aim of the model articles is to provide a base form of articles of association that can be used if bespoke provisions or not produced or required.
Decision making by directors
One of the key areas of a company’s articles of association is to set out the requirements for how decisions by directors should be taken. Decisions not taken in accordance with the articles of association are generally invalid.
The first such provision dealing with this in the model articles is article 7. Article 7 specifically states that, if the company has only one director and nothing else in the articles of association requires it to have more than one, that director can make decisions without concerning themselves with the other provisions about how director decisions should be made.
This sounds like good news and a logical inclusion for the huge number of small, sole director, companies set up using these articles of association.
Article 11 however enables the directors to fix the number of directors that need to be present for the meeting to be considered quorate. It further says that if it is not fixed it will be two directors and, regardless, it must never be less than two.
This has widely been taken to mean that sole directors may carry on and make decisions by themselves because article 7 clearly seems to allow them to do that. Many sole directors have been merrily carrying on making decisions on this basis for many years.
Worryingly however the recent High Court decision has taken the opposite view. The Court decided that article 7 did not override article 11 and, as a result, all decisions must be taken by two directors. An interesting conundrum if the company only has one director and it raises the question as to why article 7 was ever included in the first place!
What does this mean?
This means that those companies with model articles and only one director are, based on this decision, not able to make valid board decisions and that previous board decisions are equally invalid.
Under the model articles if a quorum is not present (or even possible!) the board can only decide to appoint additional directors or call a shareholders meeting to request the shareholders to appoint directors.
What should be done now?
Previous decisions should be ratified by the shareholders. The directors can only really take the actions set out above and therefore it is questionable as to whether they can even request such ratification by the shareholders without appointing another director first.
As a rule shareholders can ratify certain decisions by the directors which may not have been correctly made, however, if the sole director is also a shareholder, they will not be able to ratify their own decisions, nor will anyone connected with them be able to do so. This would put a sole director and shareholder in a sticky situation. It could mean issuing or transferring a share (ensuring it has voting rights) to an unconnected person to enable the new shareholder to ratify these decisions.
It might be sensible to change the company’s articles of association to enable decisions to be made by a sole director in future. A general review of the articles of association may be helpful too to ensure they are fit for purpose for the company.
Equally, if preferred, another director could be appointed to ensure that future decisions can be validly made.
It is worth noting that this case is currently being challenged. The result is awaiting keenly by all.
Find out further how our Corporate Solicitors can assist your business. Alternatively contact the author Gail Vallis.