Hashmi v Lorimer-Wing and the implications for companies with a sole director

The recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has highlighted inconsistencies within the Model Articles and put private companies with sole directors at risk of not being able to make decisions lawfully.

Background

The Model Articles are the default articles of association for private limited companies; companies can choose whether they would like to adopt, alter or exclude some or all of the Model Articles. 

The Model Articles say (in Article 7(2)) that ‘if a company only has one director, and no provision of the articles requires it to have more than one director… the director may take decisions’. However, Article 11 stipulates that the quorum for a directors’ meeting ‘must never be less than two, and unless otherwise fixed, it is two’. The Model Articles do not specifically set out a minimum number of directors.

Previously, it has been widely assumed that within the Model Articles, Article 7 takes precedent over Article 11, allowing a sole director to act without having a quorum for directors’ meetings. 

Hashmi v Lorimer-Wing 

By way of background to the case, Hashmi was removed as a director of the Company by Lorimer-Wing and subsequently raised an unfair prejudice petition under section 994 of the Companies Act 2006. Lorimer-Wing then filed a counterclaim against Hashmi for breach of directors’ duties amongst other things. When the other remaining director resigned shortly afterwards, Lorimer-Wing was left as the sole director in office.

The Company’s Articles under consideration by the court were a combination of the Model Articles and tailored articles which set the quorum for directors’ meetings at two – the same as the Model Articles.

The court ruled that Model Article 7(2) only permitted a sole director to make decisions for the company if there are no other provisions within the articles that require more than one director. When the quorum for directors’ meetings is set at two, it requires at least two directors to make decisions for the company. 

Furthermore, when the company does not have enough directors to satisfy the quorum, the articles limit the directors’ powers by allowing the sole director to only act to appoint another director or to convene a meeting of the members of the company. In this instance, the company’s counterclaim was struck out as the sole director lacked the decision-making power.

Impact

This judgment may result in decisions being made by a sole director of a company which has wholly or partially incorporated the Model Articles into its articles being invalid and void. 

The same argument would also apply where the quorum required for a directors’ meeting was larger than the number of directors holding office. It may be that the issue can be overcome by a special resolution passed by the members of the company concerned depending, largely, on the other provisions of its articles of association. 

If you would like any assistance with your articles of association, please do not hesitate to contact a member of our Corporate and Commercial team who would be happy to help.