Model articles and sole directors: will recent High Court ruling impact your company?

In the UK, the vast majority of companies are incorporated with model articles - the "off-the-shelf" articles provided by Companies House when incorporating a company. 

A company's articles of association are the rulebook that governs how the company operates, acting as a contract between all the members (shareholders).

The articles of a company set out, amongst other matters, a company's processes for appointing and removing directors, making decisions at board meetings, declaring dividends and transferring shares.

Model articles were introduced in 2009 to replace the previous Table A articles as the default set for companies incorporated in the UK and apply to all companies unless bespoke or amended articles are adopted. 

Model articles offer an ideal foundation for small companies where the risk of dispute between directors or shareholders is minimal. However, tailored articles should be adopted if, for example, new classes of shares are created or the company is seeking investment. 

A significant amount of small companies incorporated with model articles since 2009 have been incorporated with one individual as the sole director and shareholder of the company. 

Despite model articles at Article 11(2) stating that the quorum for a director's meeting (meaning the minimum number of members that must be present at any of its meetings to make the proceedings of that meeting valid) must never be less than two, it has long been understood and accepted that Article 7(2) of the model articles overrides Article 11(2), thereby allowing sole director companies to transact business validly, with no provision of the articles requiring the company to have more than one director. 

Hashmi v Lorimer-Wing 2022 EWHC 191 Ch

However, the Hashmi v Lorimer-Wing 2022 EWHC 191 Ch decision has cast doubt on this long-standing interpretation of model articles. 

The case involved a dispute which arose when the company tried to submit a counterclaim against a claim brought against the company for unfair prejudice. 

The company's articles had a bespoke article at 16 requiring it to have a minimum of two directors for a quorate meeting. As the company's sole director had permitted the counterclaim brought by the company, it was argued that the decision to do so was invalid as a minimum of two directors should have been present to approve the decision. 

The judge, therefore, interpreted that the existence of the bespoke Article 16 meant that the assumed overriding effect of Article 7(2) could not apply because Article 16(2) required the company to have more than one director. Therefore, the company's sole director did not have the authority to act, meaning that it now cannot be assumed that Article 7(2) overrides Article 11(2). 

Practical considerations

Essentially, the decision now casts doubt on the ability of any sole director company to transact business validly. 

For example, suppose you are the sole director and shareholder of your limited company through which you are attempting to purchase a residential property. In that case, you will not be able to produce board minutes to approve the company entering into the transaction where the resolutions are that of a sole director. 

The production of such minutes is a boilerplate condition of a mortgage offer where the borrower is a limited company, so the decision leaves sole director companies with a significant issue to address. 

The decision has been met with bemusement among practitioners, and it is hoped that the government will step in with legislation to clarify the rights of sole directors. 

Solutions for sole directors

Due to the decision, sole director companies would be prudent to do either of the following;

1. Amend the company's articles, specifically Article 11(2), to confirm that the article does not impose a requirement on the company to have two directors to transact business validly at a board meeting. It is also advised to explicitly confirm that the minimum number of directors is one and that there is no maximum number.

2. Appoint a second director, noting the sole director's lack of authority to act.

Until the government steps in to clarify the position of Model Article 11(2) and its effect of sole director companies, or the Hashmi v Lorimer-Wing decision is reversed, sole directors should be aware of this decision and ensure appropriate steps are taken before their next proposed transaction or resolution to ensure that they aren't conducting business that will be deemed invalid.

Contact our corporate solicitors 

If you are a sole director, our corporate team can help review your company's articles of association and offer specialist advice on whether amendments are necessary or whether previous decisions are valid.

We have corporate solicitors in London, Brighton, Eastbourne, Hastings, Uckfield, and Ulverston, and we work with businesses across the UK.