Are you a UK Limited Company Sole Director?

07 September 2022

Is it the end of sole directors making board decisions alone on behalf of a company?

In the recent UK case of Hashmi vs Lorimer-Wing (2022), the High Court found that under the Model Articles, a sole director cannot make board decisions alone on behalf of a company. There are thousands of companies in existence with sole directors and Companies House Model Articles, so what does this mean for them?

A bit of background

It has long been acknowledged that two of the UK ‘Model Articles’ for limited companies appear to be in conflict with one another. Firstly, article 7 (2), the general rule that director decisions are made by a majority decision, except if there is a sole director. Secondly, article 11(2), the requirement that unless a quorum has been set for director meetings, the minimum quorum is fixed at two directors. For sole directors, this poses an issue.

The hitherto accepted interpretation of this conflict has been that there should always be at least two directors present at a board meeting, unless the company only has one director, in which case that sole director can make decisions alone. However, the recent High Court ruling is that Model Article 7(2) only permits a sole director to make decisions for the company if there are no other provisions within the Articles that require more than one director. When the quorum for directors’ meetings is set at two or more, the Articles require at least two directors to make decisions for the company. In effect article 11 trumps article 7(2).

This judgment offers little in the way of guidance as to the impact and practicalities of this decision.  It is also important to note that in Hashmi vs Lorimer-Wing there was an additional bespoke Article 16 which said that a board meeting required “ … two Directors one of whom must be an Investors’ Director (if appointed) and one the Executive”. Since Articles 16 and 11(2) both stipulated two directors, the same conflict existed as in the model articles. It is unclear whether the bespoke Article 16 influenced the High Court’s judgement.

Why does this matter?

The High Court’s decision has potential implications for companies with one director using the Model Articles. There is a risk that some of the board decisions made by a sole director are called into question. This may cause problems when the company is later sold, or may mean that a single-director company is in breach of financing or other contractual agreements ratified by the board, or shareholders may dispute decisions made by the sole director. Whilst it is harder to imagine that this ruling is will be an issue for owner managed businesses, where a company incorporated under Model Articles has a sole director and is owned by a number of different shareholders then the question is whether the sole director can lawfully operate the business.

What are the potential solutions?

  • Appointing a second director so that meetings can always be quorate under either interpretation of the Model Articles;
  • Amending the Articles to allow that the quorum is one director if there is a sole director but two if there is more than one director;
  • Getting retrospective shareholder approval of a sole director’s decisions.

Best practice would undoubtedly be to amend the Articles to allow for a quorum of one, and when incorporating a new company to adopt Articles of Association that deal with the sole director issue.

How ZEDRA can help

If you need help with amending articles of association, ratifying sole director decisions, or require advice following this ruling, please contact Carolyn Arlett.

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