Sole Director Case Of Hashmi v Lorimer-Wing

If you are the sole director of a company you should take note of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), a recent decision in the High Court that considered the interpretation of the model articles for private companies. Specifically, the High Court considered the interpretation of Article 7 (Directors to take decisions collectively) and Article 11 (Quorum for director’s meetings) and whether a sole director had the authority to act on behalf of a company. 

Sole Director: Background

Private companies limited by shares incorporated under the Companies Act 2006 (the vast majority of companies incorporated in England & Wales) are free to adopt their own articles of association. Articles of association are the rules that govern how the company will be operated and administered, largely by and for the directors and shareholders. When a Companies Act company is formed, it automatically adopts what are called “model” articles of association to the extent that the model articles are not excluded or modified by other articles. The model articles of association are prescribed by the Companies Act – you can access them here.

Most companies don’t bother changing the model articles of association that they were automatically incorporated with, especially companies that are managed and owned by a single person (a sole director). 

Articles 7 to 16 inclusive of the Model Articles appear under the heading “Decision-making by directors”. Article 7 (Directors to take decisions collectively) provides:

”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.”

Article 11 (Quorum for directors’ meetings) of the Model Articles provides:

”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.”

A private company must have at least one director (section 154, CA 2006). While a company’s articles may specify a minimum number of directors, the Model Articles do not expressly do so.

It appears from the above that there is a conflict between article 11(2) and article 7(2). Article 7(2) envisages a position where there is a sole director of the company. Lawyers have therefore taken 11(2) to apply where there are 2 or more directors but that article 11(2) does not apply where there is only a sole director in the company.

Hashmi v Lorimer-Wing: facts of the case

An individual (Founder) set up a company on 27 February 2019. Founder was the company’s sole director and shareholder. 

A software developer (Developer) began working with the company in 2019 and subsequently became a shareholder in the company.

In March 2020 Developer subscribed for further shares and at this point there were multiple shareholders and investors who entered into an investment agreement. The company adopted new articles of association. Developer also became a director along with another individual (Third Director). So now there were 3 directors.

By March 2021 the Founder and the Developer had fallen out. Founder wrote to Developer on 2 March 2021 to inform him that he had been removed as a director and was deemed a “bad leaver” under the definition of “bad leaver” in the company’s articles meaning he had forfeited his shares.

Third Director subsequently resigned and ceased to be a director on 12 June 2021. So from that date, Founder was back to being the sole director of the company.

On 10 August 2021 Developer presented an unfair prejudice petition to the court seeking an order that Founder purchase his shares in the company.

On 21 September 2021 the company served a defence and counterclaim asserting various claims against the Developer including claims for breach of directors’ duties, breach of contract and pre-contractual misrepresentation.

The Developer made an application to the court seeking (amongst other things) an order that the company’s counterclaim be struck out. The Developer argued that the company’s articles of association required there to be 2 directors for a board meeting to be quorate for any purpose other than taking steps to appoint new directors. As the Founder had been the sole director of the company since 13 June 2021, he had no power to direct the company to file the counterclaim in the court.

Hashmi v Lorimer-Wing decision

The court granted the Developer’s application to strike out the company’s counterclaim therefore agreeing that the Founder, as sole director of the company, did not have the requisite authority under the company’s articles of association to make the counterclaim.

One of the court’s findings was that the model articles would require amendment to permit a single director to run a company, including the deletion of model article 11(2).

Sole Director: Comment

The court’s decision will come as a surprise to many corporate lawyers. In effect it means that companies which are sole director companies must amend their articles of association. Perhaps the government will now amend the model articles to address this issue but in the meantime, we recommend that companies with a single director amend their articles and consider whether some or all of the previous decisions of those directors should be ratified. 

EM law specialises in corporate law. Get in touch if you have any questions on the above.