Hashmi v Lorimer-Wing – A key change for sole directors

This article looks at the implications for sole directors and their businesses following the recent Hashmi v Lorimer-Wing [2022] High Court case.

The case highlighted that sole directors may be at risk of being unable to make lawful decisions where Model Articles are adopted.  

What are Model Articles?

Articles of Association (Articles) are a set of rules that govern how a limited company operates - they regulate the powers, affairs and relationships of the directors, shareholders and the company itself.  Model Articles of Association (Model Articles), as governed by the Companies Act 2006, are a generic set of Articles that limited companies can choose to adopt.

Whilst many companies adopt Model Articles, as they are fairly suitable in most situations, recent case law has questioned the suitability of companies adopting Model Articles that only have a sole director.

Contrasting Articles

The High Court case of Hashmi v Lorimer-Wing [2022] examined whether a board decision made by a sole director of a company with Model Articles is in fact valid, or whether at least two directors are necessary to create a quorum (a minimum number of directors which is required in order for a board meeting to be held).

This is due to the subjective interpretation of Article 7(2) and 11(2) of the Model Articles. Article 7(2) effectively states that if a company has only one director, then that sole director is able to make decisions on behalf of the board. However, Article 11(2) contrastingly stipulates that the minimum number of directors required to hold a board meeting must be at least two.

Prior to the ruling in Hashmi v Lorimer-Wing, it was generally accepted that under the Model Articles, there should be at least two directors for a board meeting to be validly held. However, in circumstances where the company has only one sole director, then that sole director is capable of holding a board meeting and making decisions on behalf of the company. Because of this, many companies with a sole director were, and still are, incorporated with Model Articles.

However, since the court’s ruling in Hashmi v Lorimer-Wing, this general position has now changed.

Hashmi v Lorimer-Wing - A brief overview

In the case of Hashmi v Lorimer-Wing, a shareholder sought to challenge a claim made by a company which comprised of one sole director. The shareholder claimed that the company’s articles (which were based on the Model Articles) stipulated that there must be at least two directors for a board meeting to be valid and subsequently the decision made by the sole director should be voided.

Surprisingly, the court held that in such circumstances where a sole director company adopts Model Articles, one director is not sufficient for a board meeting to be held and decisions to be made. The court treated the phrase within Article 11(2) ‘The quorum for director’s meetings … must never be less than two’ as taking precedence over Article 7(2).

The implications following Hashmi v Lorimer-Wing

There are numerous issues which may arise for companies with a sole director following the decision in Hashmi v Lorimer-Wing. Although there is potential for this decision to be appealed / overturned, sole director companies with Model Articles need to be alive to the fact that the decisions made by the sole director may be invalid.

A simple rectification of this would be for the company to appoint another director to ensure all future board meetings are quorate and compliant with Model Article 11(2). However, in practice, this may not be suitable. Alternatively, another method of mitigating this issue would be to amend the company’s Articles to clearly include a provision that allows a quorate meeting to be formed with only one sole director present.

However, irrespective of whether an additional director is appointed, or the Articles are amended, any previous decisions made by a sole director may still be rendered invalid. To ensure the company is not implicated by this, previous sole director decisions should be ratified by the company shareholders.

If you have any queries about how anything discussed in the above article may affect you or your business, please get in touch with a member of the Corporate Team for an initial discussion.