Are you a Sole Director with ghosts in the closet?

In this short case study, Glenville Walker discuss the recent case of Hashmi v Lorimer-Wing and the implications it has caused for businesses operating with only one director under the most recent set of Model Articles of Association.

Is it finally the end of all those lonely board meetings?

Articles of Association.... Remember those?

Articles of Association (Articles) essentially form the rulebook governing how a company operates and specifies the rules and regulations that must be followed by shareholders and directors. And guess what…every private limited company has them. On day one of setting up your company, you may (or may not if it was way back when) remember choosing your Articles.

Does every company have the same set of articles?

When choosing a set of Articles, every company has the option to either:

Option 1: Adopt Model Articles which are a legal and standard set of pre-drafted articles.

Option 2: Tweak the Model Articles and choose which of the model articles will or will not apply to your company.

Option 3: Adopt an entirely bespoke set of Articles.

Options 2 and 3 will usually require assistance from a professional adviser to ensure the Articles are legally compliant.

There are numerous versions of Model Articles as they have developed over time. The latest Model Articles apply to private limited companies incorporated on or after 28th April 2013 and these are the Articles relevant to this case study.

A spotlight on the case study - Hashmi v Lorimer-Wing 2022

Hashmi was a director and shareholder of the company in question and found himself to be removed as a director of the company following a series of disputes with his fellow director, Lorimer-Wing. Hashmi decided to raise an unfair prejudice claim against the company to which the company then actioned a counterclaim, asserting that Hashmi was in breach of his director’s duties.

Hashmi sought to invalidate this counterclaim on the grounds that the company’s articles (which were based on the most recent Model Articles) did not permit a board meeting to be held by only one director and that this invalidated the company’s decision to make a counterclaim against Hashmi. Hashmi argued that, under the Model Articles, a board meeting can only be properly held if there is a minimum of two directors and so any decision made by Hashmi as a sole director of the company should be declared invalid.

The debate hinged on two articles in the Model Articles, Article 7(2) and 11(2) which appear to be contradictory in nature.

Article 7(2) states that in the case of a company with one director, they can take board decisions without regard to any provisions in the articles regarding decision making by directors. This seems to allow sole directors to make certain decisions on their own.

On the other hand, Article 11(2) states that the quorum for a directors’ meeting must never be less than two which means that, unless two directors are present, decisions cannot be properly made at board meetings. This article clearly presents a problem for sole directors, but it has been long understood that article 7(2) mentioned above overrides this article.

Surprisingly in this case, the High Court took a contrasting view. The court decided in fact that Article 11(2) overwrites Article 7(2) and Lorimer-Wing lacked the adequate authority under the company’s articles to conduct a board meeting and remove Hashmi as a director.

What does this mean for sole directors and what is the solution?

This decision has potentially left sole directors exposed to the possibility that past decisions made by sole directors are rendered invalid.

Solutions:

If it is appropriate, consider appointing another director in order to comply with Article 11(2) of the Model Articles.

Amend your articles to ensure you are protected from similar issues in the future.

Obtain retrospective approval of any past decisions made by a sole director.

Our advice to sole directors…check your articles!