Two recent first instance decisions have thrown into doubt whether or not a sole director of a company can make decisions and/or whether a single director can effectively act if, in the past, the company had two or more directors. Although the case of Hashmi v Lorimer-Wing [2022] is likely to be limited to its specific facts, until further clarification is provided by a higher court, companies operating with a sole director should seek urgent legal advice regarding the validity of past and future decisions.
The issue in Hashmi v Lorimer-Wing, also known as Fore Fitness, is whether the Model A
rticles of Association permit a sole director to make general company decisions. Before examining the decision in Hashmi and the subsequent ruling in Re Active Wear [2022] EWHC 2340 (Ch), in which the presiding judge disagreed with the reasoning in Hashmi, let us set down the problematic Articles on which the two cases are concerned with.
What do the Model Articles say regarding director decision making?
Before examining the relevant Model Article provisions, it is important to start with the fact that section 156 of the Companies Act 2006 expressly allows a company to have only one director. Furthermore, section 20 states that in the case of no other Articles being registered, the Model Articles will apply.
Article 7 of the Model Articles provides:
Directors to take decisions collectively
7.—(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.
Therefore, if the Model Articles have been adopted verbatim, as is the case in many small companies, there will be no provision stating that the organisation requires more than one director. It logically follows that the decisions of a sole director are valid as they are exempt from any provisions contained in the Articles relating to their decision making.
Article 11 of the Model Articles provides:
Quorum for directors' meetings
11.—(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.
What was the decision in Hashmi v Lorimer-Wing?
Mr Richard Farnhill sitting as a Deputy Judge of the Chancery Division stated in Hashmi:
“A provision in the articles requiring there to be at least two directors to constitute a quorum logically is a requirement that the company in question have two directors to manage its affairs.”
He concluded that:
“amendment is required for the Model Articles to permit for a single director to run a company.”
There are three key facts to consider when examining Mr Farnhill's ruling:
- Fore Fitness did not adopt the Model Articles unamended. A bespoke Article 16 was included which stated: “The quorum for meetings of the Board shall be two Directors.”
- There had at times been more than one director of Fore Fitness – Hashmi was removed by Lorimer-Wing.
- Because of the inclusion of Article 16, Mr Farnhill's judgement as it relates to unamended Model Articles may be considered obiter.
Did the decision in Re Active Wear support the ruling in Hashmi?
To add to the confusion on this issue, Deputy High Court Judge John Martin QC, when ruling on Re Active Wear a few months after the Hashmi decision, disagreed with the reasoning in the earlier case, stating:
“It appears to me plain that, under the terms of the unamended Model Articles, a sole director of a private company may take on his or her own any decision relating to the conduct of the affairs of the company. That, as it seems to me, is the unambiguous effect of Article 7”.
He went on to distinguish Re Active Wear from Hashmi on the grounds that the latter included a bespoke Article 16. In the Deputy High Court Judge's view the suggestion that Model Article 11(2) required two directors “would be to deprive Article 7(2) of any practical meaning” and that applying ordinary rules of construction when examining the Articles as a whole, the quorum provisions in model article 11(2) should not be construed as requiring for a company to have a minimum of two directors.
Wrapping up
It is worth noting that in the case of Re Active Wear there had never been more than one director which is another point that distinguishes it from Hashmi. Following the two aforementioned decisions, the issue of whether or not a sole director can act in a decision making capacity remains uncertain until a higher court provides clarification.
At present, therefore, if you are the sole director of a company you should consider:
- Adding a bespoke clause expressly permitting a sole director to make decisions if you are using the unamended Model Articles. Alternatively, a further director could be appointed (by a sole director and/or by shareholder resolution) to ensure that future decisions are not in doubt; and
- Having previous decisions ratified to prevent disputes from developing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
