The judgment in Hashmi v Lorimer-Wing, found that a private limited company operating under the model articles (the “Model Articles”) for private limited companies must have a minimum of two directors and that the Model Articles require an amendment to permit a single director to make decisions.

However, the more recent case of Active Wear Limited [2022] EWHC 2340 (Ch) (“Active Wear”), determined that a company which adopted the Model Articles without modification can operate with the incorporation of only one director.

Background

Before Hashmi v Lorimer Wing, the widely accepted interpretation of Article 7(2) of the Model Articles was that if a company has a sole director and no provision of the article that requires the company to have more than one director, a sole director had the power to make decisions alone, without the need for a quorate board meeting.

It was also understood that Article 11(2) of the Model Articles asserted that the quorum may be fixed from time to time by a decision of the directors but must never be less than two. It was understood that this Article would only apply to a scenario where the company had more than one director.

The judgment determined in Hashimi v Loimer-Wing brought uncertainty as the High Court ruled that requiring a quorum of at least two for board meetings, as stated in Article 11(2) of the Model Articles, was setting a minimum requirement for two directors to attend a quorum for private limited companies that adopted the Model Articles.

This distinction shocked many, as it contradicted what had been, until that point, the general understanding of how the Model Articles functioned. This ruling also created various contradictions with the intention of the legislation, such as with section 154 of the Companies Act 2006, which states explicitly that a private company is allowed to have a single director.

By contrast, the judge in Active Wear found that Article 7 of the Model Articles had an “unambiguous effect” on those acting as the sole director of a private company, which allows them to take any decision relating to the conduct of affairs of the company on their own.

Moreover, the judge in Active Wear suggested that if a company with unamended Model Articles has more than one director, but the number of directors falls to one, Article 11(3) of the Model Articles would not apply, and the sole director’s authority would not be restricted to appointing a second director, thus contradicting the judgment made in Hashmi v Lorimer Wing.

What is next?

The judge in Active Wear distinguished companies with unamended Model Articles, such as Active Wear, from companies like Fore Fitness from Hashmi v Lorimer Wing, a company with amended Model Articles.

As such, the decision found in Active Wear will relieve many companies operating with a sole director under unmodified or slightly modified Model Articles but not companies with heavily modified Model Articles.

Consequently, the key practical points for directors and shareholders of companies remain:

• Persons in a new company should ensure that their company’s articles are appropriately drafted. If the new company’s intention is to be able to operate with only one director, the Articles should reflect this stance.

• Persons in established companies should review their articles of association, particularly Model Articles 7 and 11, which can be in either a modified or unmodified form. A company that has reviewed its articles of association should decide whether it needs the ability to operate with a sole director. If it does, that company should consider putting forward amendments to its Articles to make it clear that this will be the case.

Griffin Law is a dispute resolution firm comprising innovative, proactive, tenacious and commercially-minded lawyers. We pride ourselves on our close client relationships, which are uniquely enhanced by our transparent fee guarantee and a commitment to share the risks of litigation.  If your company has historically operated with only one director, or you are unsure whether the above affects you and wish to discuss it further, a member of our team will be able to assist and discuss your options in more detail. Please email justice@griffin.law or call 01732 52 59 23.

GRIFFIN LAW – TRANSPARENT FEES. TENACIOUS LAWYERS. TRUSTED PARTNERS.

Nothing in this document constitutes any form of legal advice upon which any person can place any form of reliance of any kind whatsoever. We expressly disclaim, and you hereby irrevocably agree to waive, all or any liability of any kind whatsoever, whether in contract, tort or otherwise, to you or any other person who may read or otherwise come to learn of anything covered or referred to in this document. In the event that you wish to take any action in connection with the subject matter of this document, you should obtain legal advice before doing so.

© Griffin Law Limited, 2022. All rights reserved.