Recent High Court ruling to impact private companies with a sole director

Recent High Court ruling to impact private companies with a sole director

The ruling from the recent Hashmi v Lorimer-Wing High Court case has determined that a private limited company which has adopted model articles must have a minimum of two directors.

What is the problem?

The general understanding of the model articles was that, pursuant to model article 7(2), a company with one director could make decisions without regard to any other provisions in the articles relating to director’s decision making.

However, the High Court ruling has determined that model article 11(2) (quorum for directors’ meetings) imposes a requirement for a company to have a minimum of two directors, and as such model article 7(2) cannot be relied on to overrule the other decision-making procedures. The High Court’s ruling ultimately suggests that any decision taken by a sole director may be invalid and could therefore be open to challenge.

The ruling affects the following:

• Sole director companies with model articles adopted (including all future and past decisions made).
• Companies with model articles adopted which, although they may not currently have only one director, may have done so in the past or may do so in the future.
• Companies operating under bespoke articles which also include articles similar to the model articles in relation to the directors’ decision making.
• All new incorporations of companies with a sole director.

Failure to act may result in relevant companies being refused finance and dividend transactions (amongst all other business decisions) possibly being deemed invalid.

Possible solutions to consider

It is anticipated that either; the Government will look to review the model articles and clarify the conflicted articles; or that the decision made may be appealed in due course.

In the interim, should you have any concerns on the decisions made by a sole director, the following solutions are available for you to consider:

• Appoint at least one additional director to ensure any future board meetings meet the requirement for a quorum.
• Adopt amended articles of association which permit a sole director to make decisions.
• Pass a resolution to ratify all previous decisions made by the sole director in order to address any potential breaches.

We are here to help

If you’d like to discuss any of the above or how the ruling could affect your business, please get in touch with your usual Azets advisor or a member of our specialist team.