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The recent judgement from the case of Hashmi v Lorimer-Wing has found that a private limited company, whose articles of association are (or are based on) the model articles for private limited companies (the “Model Articles”), must have at least two directors when exercising general company decisions. This decision has potential implications for smaller companies with a single director and could put them at risk of acting ultra vires when making company decisions alone.
By way of background, Fore Fitness Investments Holdings Limited (the “Company”) had two directors, Hashmi and Lorimer-Wing, both of whom were also shareholders of the Company. The Company’s articles of association were based on the Model Articles, with certain bespoke provisions included.
Hashmi was later dismissed as a director of the Company by Lorimer-Wing following a series of disagreements between them. Lorimer-Wing wrote to Hashmi to inform him that he had been removed as a director (and to inform him that he was deemed a “Bad Leaver” in accordance with the Company’s articles of association). Hashmi subsequently raised an unfair prejudice petition under section 994 of the Companies Act 2006, following which Lorimer-Wing served a counterclaim (acting on behalf of the Company) against Hashmi for breach of directors’ duties, among other things.
Hashmi sought an order for the counterclaim to be struck out, contesting that Lorimer-Wing lacked the power to direct the Company to file a counterclaim on the basis that he did not have the requisite authority to do so as a sole director under the Company’s articles (following the dismissal of Hashmi). This led the High Court to consider the relationship between model article 7 (directors to take decisions collectively) and model article 11 (quorum for directors’ meetings) and decide whether a sole director could legally act on behalf of its company.
The High Court ruled that the Company’s counterclaim was to be struck out on the grounds that Lorimer-Wing did not have the power under the Company’s articles to issue the counterclaim and had therefore acted unlawfully in doing so.
In reaching its decision, the High Court reviewed the Company’s bespoke articles (which were largely based on the Model Articles) and considered the relationship between Model Articles 7(2) and 11(2).
Model Article 7(2) allows a sole director to make decisions on behalf of the company provided that there are no other provisions in the articles for the company to have more than one director.
Model Article 11(2) sets the quorum for a meeting of the directors at not less than two directors.
In this case, the Company’s articles of association also included a bespoke provision which specifically set the quorum for a board meeting at more than one.
In considering the above, the High Court found that Model Article 7(2) only allows a sole director to make decisions on behalf of the Company provided that there are no other provisions within the articles that specify the quorum at more than one director. Model Article 11(2) (and in this case the inclusion of the bespoke article) required the Company to have more than one director for board meetings to be valid. It was decided that Model Article 11(2) and the bespoke article should be read as a disapplication of Model Article 7(2).
Therefore, it was ruled that Lorimer-Wing could not legitimately take decisions alone on behalf of the Company, and so the filing of the counterclaim was struck out. In accordance with the Company’s articles, at least two directors were required to make company decisions (even where there was only one remaining director).
The judgement in Hashmi v Lorimer-Wing evidently has potential implications for private limited companies with one director where the Model Articles (or similar) are adopted. The outcome of the case is particularly important as, until now, it has been widely accepted that a sole director could make board decisions alone under the Model Articles. The Department for BEIS had also previously published guidance reinforcing this position.
It is worth noting that while sole directors may not be able to legitimately take board decisions alone, there are some exceptions set out in Model Article 11(3) which allows a sole director to take decisions alone if they are either (a) appointing further directors or (b) calling a general meeting to enable the shareholders to appoint further directors in accordance with Model Article 11(3).
Set out below is a short summary of the potential consequences of this case on sole director companies and what sole directors should consider going forward.
Whilst it is understood that a recent unreported High Court decision (Re Active Wear Limited (In Administration) may appeal the ruling in Hashmi v Lorimer Wing, the Hashimi judgement remains the current legal position, and so (strictly speaking) steps should be taken to ensure that such companies are acting lawfully.
As briefly mentioned above, a sole director company may rely on Model Article 11(3) to appoint at least one additional director to the board. This would satisfy the quorum set out in Model Article 11(2).
Sole director companies with Model Articles (or similar) could also amend their articles to disapply Model Article 11(2) and specifically allow for a sole director to make company decisions alone.
In addition to the above, it is also advisable for sole director companies to ratify previous decisions made by a sole director and seek retrospective member approval to prevent previous company resolutions being challenged.
George Jones and Bethany Johnson
14 October 2022