As a sole director, are you lawfully making decisions?

By Toby Walker

Associate Solicitor

24 October 2022

Article Insights

Hashmi v Lorimer-Wing: the original judgement

A recent landmark decision by the High Court in Hashmi v Lorimer- Wing [2022] EWHC 191 (Hashmi) seemed to have far reaching implications for companies with a sole director incorporating the Model Articles. In this particular case the judge decided that the company’s articles of association, being amended Model Articles, required the quorum requirement to be satisfied by the attendance of at least 2 directors at board meetings – thus disregarding Model Article 7(2) which allows a sole director to generally act on behalf of the company without any restrictions. This meant that decisions taken when the company only had one director in office were invalid since the articles of association had to be read as requiring the appointment of at least a further director in order to satisfy the bespoke article requirements.

Many questioned not only the potential third party impact the Hashmi judgment may have on companies that adopted Model Articles/ amended Model Articles but also the potential need to appoint a second director to revisit and ratify all decisions made by the sole director.

Re Active Wear Limited: return to normality (nearly)

Following on from the decision in Hashmi, the High Court considered the Hashmi judgement whilst reaching a decision in Re Active Wear Limited [2022] EWHC 2340 (Ch). The case of Active Wear Limited was slightly different to Hashmi as Active Wear Limited had adopted the Model Articles without any amendments.

The judge in Re Active Wear Limited reached a decision that suggested that, where the Model Articles are adopted, a sole director can generally act on behalf of the company without any restrictions as Model Article 11(2) will be disapplied by Model Article 7(2).

However, in reaching his decision, the judge referred to the Hashmi judgment and noted that the facts of Hashmi are to be distinguished from the facts of Re Active Wear Limited as Hashmi related to a company which has amended Model Articles whereas Active Wear Limited had adopted the Model Articles, without amendments.

What does this mean to companies with a sole director?

Re Active Wear Limited confirms that Model Articles (without amendments) are suitable for adoption by company with a sole director. However, where the company has adopted bespoke articles (even if amended Model Articles), the company must ensure that the bespoke articles do not contradict Model Article 7(2), where applicable.

Should a company with a sole director have bespoke articles that contradict Model Article 7(2) (where applicable), the company may need to consider the following actions to mitigate any potential claims:

1. Appoint additional director(s)

By appointing further director(s), the board will be able to satisfy the quorum requirement in relation to decision making in accordance with the bespoke articles. This would remove the uncertainty created by the Hashmi judgement relating to the validity of any future resolutions passed.

However, this may be trickier to do in smaller, owner-managed businesses where the same person is the sole director and shareholder. It may be difficult to find another similar- minded person with the knowledge, experience and dedication to the business to be a director. This may create new problems, albeit solve the issue of meeting the quorum. This also doesn’t resolve the decisions already taken by the sole director.

2. Amend the Articles of Association

Instead of finding someone to fill the role of a second director, it may be simpler to amend the articles of the company to ensure that any further decisions made by the sole director will be valid.

The articles of a company can be amended by a special resolution of the shareholders. However, as with the appointment of further director(s), decisions already taken by the sole director will not be ratified.

3. Retrospective Approval

As set out above, appointing additional director(s) and/or amending the articles will not validate past decisions made by the sole director under the existing articles of association. Retrospective approval from the shareholders of the company may be required to ratify certain decisions made by the sole director. This may be more relevant if the company is planning on being sold and may be raised by a buyer during the due diligence process.

If you require any assistance in considering whether the above matters concern your company or have any other queries in relation to your company’s articles of association, please do not hesitate to contact Toby Walker, a solicitor in our Corporate & Commercial team.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.