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The result of a recent court case in the UK has cast doubt on the ability of a limited company sole director to make decisions if they are using the Model articles of association.
In this blog, we look at everything you need to know, including what you should do if you are a sole director. Let’s get started.
What is a sole director?
To be incorporated, and then remain in ‘good standing’, a private company limited by shares requires a minimum of one ‘natural’ person appointed as a director. If a company operates with just one director, this person can be referred to as a sole director.
What are the Model articles of association?
The articles of association are the principle rulebook of a company and set how a company should be managed. It includes sections dedicated to the powers and responsibilities of the directors and members (the owners of the company).
The Model articles of association were introduced on 1st October 2009 and updated on 28th April 2013. These are a default set of documents that are suitable for the majority (but not all) of small private companies.
When forming a company, the Model articles of association are used as the default if you don’t attach your own set (regardless of whether you form directly with Companies House or with a company formation agent, such as us).
What has happened?
A court case in March has thrown into question the ability of a sole director to pass board resolutions if their company is operating using the Model articles of association.
The Hashmi v Lorimer-Wing case
Fore Fitness Investments Holdings Limited, who were using a modified form of the Model articles of association, attempted to file a counterclaim against a shareholder, who brought a claim to court for unfair prejudice.
However, the counterclaim was questioned by the shareholder, as there was only one director in place when the decision to make the counterclaim was made.
The judge’s decision? They ruled in favour of the shareholder.
This has been considered a surprising outcome by industry experts.
The problematic articles
The issue is to do with the two articles below:
(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
(2) If –
(a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision—
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.
To put it simply:
7: If a company has a sole director, that director can make board decisions.
11: A directors’ meeting should typically not have less than two directors present for it to be valid.
As you can see, the two articles appear to contradict each other.
To add further confusion, Fore Fitness Investments Holdings Limited had made amendments to the Model articles of association (bespoke article 16) that outlined the requirement for two directors to be present at directors’ meetings.
Nonetheless, the contradiction between articles 7 and 11 remained.
Why wasn’t this a problem before?
As we touched on, the Model articles of association have been in place since 2009. Since then, the general industry view and commentary was that the model articles enabled sole directors to operate effectively.
Article 7 very much took precedence over article 11, meaning that a sole director could make decisions for the company.
It is problematic now because of the unexpected result of the Hashmi v Lorimer-Wing case.
The ramifications of having a sole director
Any decisions that have been made in a sole director company can be disputed by shareholders – even retrospectively.
If you’re a sole director and sole shareholder – so operating the company by yourself – you may find that banks and other lenders are unwilling to lend to you, as future shareholders can theoretically question your choices. Similarly, suppliers may not want to work with you.
Even if your company has two directors, you are still at risk as one of these could resign, leaving you with just one.
I have a company with a sole director, what should I do?
Our recommendation at this stage is that you need to act. We suggest one of the following:
1. Ensure your company has at least 2 directors appointed
The normal criteria for appointing a director still stand. The person needs to be willing and able, and they must adhere to the responsibilities of being a company director.
However, you will still only be one resignation away from potential trouble, so the safer option is the one below.
2. Adopt new articles so that the sole director can clearly make a decision
By going back to the cause of the problem, this being the contradiction in the Model articles of association, and fixing it – your sole director company can operate in a way that ensures future decisions are legitimate.
Do you need help doing this?
We offer an Article Amendment Service (£169.99 + VAT) – give us a call on 020 3984 5385 for more information.
Once you’ve done this, you should consider shareholder ratification for previous decisions made by a sole director in the company. This can be done at a general meeting or by arranging a written shareholders’ resolution.
Thanks for reading
We understand if you still have queries regarding this. Please leave any questions via a comment and we’ll be more than happy to help.