Articles of Association (‘Articles’) are a key element in the formation of a company. The Articles set out all the rules which dictate how the company is run. It is a mandatory requirement for all limited liability companies in the UK incorporated under the Companies Act 2006 to have Articles and Model Articles that are automatically included. Companies do, however, have the freedom to adopt, vary or exclude some or all of the Model Articles.
Model Articles 7 to 16 lay out the rules and customs for directors when making a decision, in particular Articles 7 and 11 discuss the issue of sole directors and how many directors are needed to pass a resolution.
Model Article 7 (2), states that where a company only has one director, and its Articles do not require it to have more than one director, the general rule does not apply, and the director may make decisions without having regard to the other provisions of the Articles relating to the directors’ decision making.
Model Article 11 (1) says that unless a director’s decision is quorate, no decision can be voted upon other than to call another meeting (a decision will only be quorate if made by a specified number of directors).
Model Article 11 (2) allows the directors to fix the quorum for directors’ meetings from time to time, but it must never be less than two, and unless otherwise fixed it is two.
Model Article 11 (3) states that if the total number of directors for the time being is less than the quorum required, the director must not take any decision other than to appoint further directors or to call a general meeting so as to enable the shareholders to appoint further directors.
While Article 7 (2) and Article 11 appear to contradict themselves, it is usually accepted that where a company has one director, Article 11 (2) can be disregarded and a sole director can make any decision they please.
However, this position was put under scrutiny in the case of Hashmi v Lorimer-Wing [2022] EWHC 19. Model Article 7 (2) and Model Article 11 (2) and (3) were considered and it was held by the High Court that where the Model Articles have been adopted, a company must always have at least two directors that will have the authority to make decisions. The Court’s decision overruled Article 7 (2) and made it clear that Article 11 (2) should always be observed.
The decision in Hashmi v Lorimer-Wing has meant that sole directors no longer have the authority to pass board resolutions other than to appoint additional directors.
In light of the decision in Hashmi v Lorimer-Wing, where does this leave existing companies who have adopted the Model Articles and who have only one director?
In the event of a dispute, sole directors may now be at risk of their decisions being challenged. There may now be grounds to hold any board resolutions passed by a sole director as invalid and therefore void. To avoid this, companies with sole directors should now consider the following options: the sole director should look to appoint an additional director so that they can make decisions compliant with Article 11 (2); or amend their Articles, to disapply the wording in Article 11 (2), so that one director may constitute a quorum (this may only be done once an additional director has been appointed, once this resolution has been passed that additional director may resign).
The decision of Hashmi v Lorimer-Wing was held this year, so it is likely that the government will seek to amend the Model Article to be in line with the decision. However, until then, it is recommended that existing companies with sole directors attempt to mitigate any potential disputes on validity by choosing to appoint another director to manage the company or appoint another director solely for the purposes of amending their Model Articles to allow one director to make decisions.
Companies now looking to be incorporated should greatly consider the High Court’s decision in Hashmi v Lorimer-Wing if they plan to only have one director. In such case, before incorporation, Article 11 (2) should be amended so that one director can constitute a quorum.
For advice please contact our team on info@barnes-law.co.uk.
