Hashmi v Lorimer-Wing [2022]: what it means for sole company directors

There is now a question over whether a director of a private limited company can pass board resolutions while being the only director of the company, or whether two or more directors are required to constitute a quorum (minimum number of officers required to hold a board meeting). Public companies are not affected by this problem because they are unambiguously required to have a minimum of two directors.

It has long been known that two of the model articles seem to contradict one another. It is debatable whether they mean that a single director can or cannot hold a director’s meeting and/or make board decisions alone on behalf of the company. One view (that they can) has hitherto dominated and has not been seriously questioned in court until now.

It has long been known that two of the model articles seem to contradict one another.

The judge in this case held that a sole director operating under the model articles of association cannot make board decisions alone on behalf of the company. In other words, the High Court found that under the model articles, the minimum number of directors required for a company to function is two. This is contrary to accepted wisdom and, in principle, has opened the door for sole directors’ boardroom decisions to be challenged.

If you wish to skip the details of the case and go straight to what we think are good practical solutions, please see the solutions section below.

An unexpected decision

The case Hashmi v Lorimer-Wing [2022] EWHC 191 involved Fore Fitness Investments Holdings Limited. To summarise, a shareholder sought to invalidate a claim made by a company with a sole director on the grounds that the articles adopted by the company (which were based on the model articles) did not permit a board meeting to be held by only one director. In the shareholder’s view this invalidated the company’s decision to make the disputed claim.

The shareholder argued that the articles required a minimum of two directors for a meeting to be held, and that the board decision made by the single director should be annulled. The judge ruled in favour of the shareholder. This has created considerable consternation among corporate lawyers.

The debate hinges on two articles in the model articles of association for private limited companies. Articles 7(2) and 11(2) appear to be contradictory.

• The first says that in the case of a company with only one director, this sole director can take board decisions without regard to any provisions in the articles about decision-making by directors.
• The second says that the quorum for a directors’ meeting must never be less than two.

The judge ruled in favour of the shareholder, which has created considerable consternation among corporate lawyers.

It is important to note that in the specific case considered by the High Court there was also a bespoke Article 16 which said that a board meeting required ” … two Directors one of whom must be an Investors’ Director (if appointed) and one the Executive”. But since Articles 16 and 11(2) both stipulated two directors, the same conflict existed as in the unamended model articles. Yet it remains unclear whether the bespoke Article 16 influenced the judge’s decision.

Possibly the longstanding contradiction in the model articles was itself sufficient to affect the High Court’s decision. It is reasonable to ask whether the same outcome would have resulted from this case had there been no bespoke Article 16.

Until Hashmi v Lorimer-Wing [2022], the model articles have generally been interpreted as meaning ‘There should always be at least two directors present at a board meeting, unless the company only has one director, in which case that sole director can make decisions alone.’ In other words it has been widely held that Article 7(2) trumped Article 11(2).

However, the judge found in the shareholder’s favour by ruling that one director was not sufficient for a board meeting to be held and decisions to be made. The court treated the phrase ‘The quorum for director’s meetings … must never be less than two’ as an absolute and as taking precedence over Article 7(2).

In the absence so far of further test cases involving companies with unamended model articles, it would be prudent for sole director companies to examine their articles of association and amend them where necessary to mitigate this potential problem. We offer help with this below. But first we will examine some practical implications that could emerge from this ruling.

… it would be prudent for sole director companies to examine their articles of association and amend them where necessary to mitigate this potential problem.

Some practical implications

There are many companies in existence with a sole director and articles that are either unamended model articles or heavily based on them. This judgement could mean that board decisions made by a sole director are now open to being challenged and overturned by citing this case as precedent.

The existence of thousands of companies with sole directors and model articles implies that it has hitherto been safe to assume that sole directors have the power to make decisions.

With that now in question, some practical problems that might arise include:

• Even if a company currently has more than one director, it is possible they may drop to a single director in future and decisions made then would be ultra vires (outside their legal power). This is indeed what happened leading up to Hashmi v Lorimer-Wing [2022]: there were three directors; two fell out, one was removed and the other resigned, leaving only one.
• Even if a company currently has the same single director and shareholder (who is unlikely to fall out with themselves), other shareholders could be added in future who might then dispute decisions made by the sole director.
• If a single-director company is looking for financing, a lender will want to ensure that decisions made by the director are valid and enforceable.
• It could put a single-director company in breach of existing loan agreements and certain other contractual arrangements ratified by the board. For example, if a sole director signed an agreement on behalf of a company using the model articles, and there was later a dispute, the other party to the agreement might claim the director could not properly enter into the agreement.
• It may become an issue as part of a due diligence process if the company is later sold.

This judgement could mean that board decisions made by a sole director are now open to being challenged and overturned by citing this case as precedent.

A decision to appoint a new director can be taken by a sole director under Model Article 11 (3), which provides that if the total number of directors is less than the quorum (i.e. one director in this case), he or she is allowed to appoint another director or call a members’ meeting to appoint another director. Thus a sole director can appoint another director. With another director appointed, Article 11(2) can be said to be complied with.

2. Amend the articles of association

Most companies will choose to adopt new articles of association which resolve the confusion. Happily, this is quite simple to do. To help companies facing this issue, Inform Direct has created a simple revision to the model articles of association. It disapplies clause 11(2) so that decisions made by a sole director are valid. Download this amended version of the model articles.

Most companies will choose to adopt new articles of association which resolve the confusion.

We offer for purchase a set of enhanced articles which are amended to solve this issue plus several others. The enhanced articles are available for companies with one, two or three share classes and address the following issues:

• Shareholder pre-emption rights on share transfers
• Provisions to make a meeting quorate with just one member present at general meetings
• Provisions to make a meeting quorate with just one director present at board meetings
• Provisions for a director to appoint an alternate director to act in their capacity during their absence
• Provision for the directors to appoint any person who is willing to act as company secretary, including a director

Those wishing to read further on this topic can refer to our article on the Inform Direct enhanced articles of association.

To change a company’s articles of association, the member(s) need to call for the change by requesting that the company pass the necessary resolutions. This can be done by holding a general meeting or via a written resolution. Download a free template for a written resolution to change the articles of association.

More on this procedure can be found in our a full explanation of how to change a company’s articles of association.

The above deals with existing companies. When forming a new company, it is equally sensible to adopt articles of association that are amended to deal with the sole director issue. In this case there is no need for a special resolution to amend the articles; they can be adopted from day one by delivering them to Companies House as part of the documents of incorporation. This can be done in Inform Direct by using the amended or enhanced articles as described above, or with a set of bespoke articles based on professional legal advice.

When forming a new company, it is equally sensible to adopt articles of association that are amended to deal with the sole director issue.

3. Get retrospective member approval of a sole director’s decisions

Changing the articles and/or appointing a second director will not prevent challenges to past decisions where there was only one director. To address these, it may be desirable to get retrospective member approval.

This will require a written shareholders’ resolution. We have created a draft written shareholders’ resolution for this purpose that is free to download here.

While there is no statutory requirement to file this ordinary resolution at Companies House, we are recommending doing so. It will reassure anyone viewing the company’s public record to see that decisions made while there was only one director under the unamended model articles have subsequently been validated.

Changing the articles and/or appointing a second director will not prevent challenges to past decisions where there was only one director. To address these, it may be desirable to get retrospective member approval.

What might happen now

There is the possibility that that the government will look to amend the model articles to alleviate this issue for sole director companies in future. It seems unlikely that this would be effective for existing companies which use the model articles. Given this, best practice would be to change the articles of association.

The decision in Hashmi v Lorimer-Wing [2022] may be appealed, or another case brought that changes the position. Neither of these is likely to be quick, so again, amending a company’s articles is a prudent step at this stage.

… best practice would be to change the articles of association.

The decision could be appealed, but as of November 2022 there has been no news to that effect.

While this article provides the resources for you to make the recommended changes to the model articles, if you are at all unsure we strongly recommend taking professional legal advice.