Business

(All references in this article to any company or companies are to private companies limited by shares)

(any reference to ‘Fore Fitness’ means the case of Hashmi v Lorimer-Wing [2022])

Recently I wrote an article (also published on this website) about articles of association of private companies limited by shares and the High Court case of Hashmi v Lorimer-Wing [2022]; this case established that the ‘Model articles for private companies limited by shares’ (the ‘Model Articles’) are inadequate for enabling a sole director to manage a company because they require at least two directors to manage a company.

Model Article 7 states:

“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.”

Model Article 11 states:

“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.”

The judge in Hashmi v Lorimer-Wing [2022] ruled, amongst other things, that Model Article 11(2) requires at least two directors to manage a company; this was surprising and contrary to a previous understanding that Model Article 7(2)(a) and (b) prevails over Model Article 11(2), enabling a sole director to manage a company governed by the Model Articles.

However, the recent High Court case of Re Active Wear Ltd [2022] is at odds with Hashmi v Lorimer-Wing [2022].

Re Active Wear Ltd [2022] involved an application to the High Court to declare whether administrators of a company were validly appointed by its sole director or not. One of the judge’s reasons for ruling that the administrators were validly appointed was that Model Article 7(2)(a) and (b) enables a sole director to manage a company. In reaching this decision, the judge in Re Active Wear Ltd [2022] applied the legal principles governing the interpretation of written contracts and ruled that the “unambiguous effect of” Model Article 7(2)(a) and (b) is to enable a sole director of a company governed by the Model Articles to manage that company.  The judge in Re Active Wear Ltd [2022] also ruled that Model Article 7(2)(a) and (b) “prevails over” Model Article 11(2). This is a welcome judgment, as it recognises what is arguably the very purpose of Model Article 7(2)(a) and (b), that is, to accommodate companies which are governed by the Model Articles and have a sole director, so that such sole directors in these circumstances can manage the companies they are directors of “…without regard to any of the provisions of the articles relating to directors’ decision-making” (Model Article 7(2)(b)), such as those contained in Model Article 11.

The judge in Re Active Wear Ltd [2022] addressed the judgment in Hashmi v Lorimer Wing [2022] directly.

In Hashmi v Lorimer-Wing [2022], the company which had a sole director was, in addition to being governed by the Model Articles, also governed by a bespoke Article 16 which stated, amongst other things, that the quorum for a board meeting of the company is two directors, and it amended Model Article 11(2) by imposing some different rules regarding the company’s directors’ meetings.

Whilst upon a reading of the judgment in Hashmi v Lorimer-Wing [2022] it is clear that the judgment applies generally to the interpretation of Model Article 11(2) and Model Article 7(2)(a) and (b) (which I stated in my previous article), the judge in Re Active Wear Ltd [2022] interpreted Hashmi v Lorimer-Wing [2022] as being decided as it was, due to the presence of the bespoke Article 16; the judge in Re Active Wear Ltd [2022] stated that it is: “…clear that the factor dictating the result in Fore Fitness was the existence of Bespoke Article 16.” In relation to the Model Articles, the judge in Re Active Wear Ltd [2022] stated that: “…it cannot have been the intention that they would need to be amended…” in order for Model Article 7(2)(a) and (b) to enable a sole director to manage a company in certain circumstances. Thus, the case of Re Active Wear Ltd [2022] provides legal authority for the legal position that Model Article 7(2)(a) and (b) prevails over Model Article 11(2) and suggests that this legal position may only be displaced if there is a bespoke article in a company’s articles of association which imposes different rules regarding directors’ decision-making.

However, the judge in Re Active Wear Ltd [2022] also stated that Model Article 7(2)(a) and (b) only applies when a company has never had more than one director. Therefore, whilst there is now clear legal authority for Model Article 7(2)(a) and (b) prevailing over Model Article 11(2) when a company has a sole director at the time of incorporation, and has never had more than one director, applying the view of the judge in Re Active Wear Ltd [2022], if a company, governed by the Model Articles, has more than one director and then enters into a state of having a sole director, Model Article 11 will prevail, meaning that at least two directors will be required to manage that company, and a sole director in these circumstances could only appoint further directors or call a general meeting so as to enable that company’s shareholders to appoint further directors in accordance with Model Article 11(3).

It is important to note that Re Active Wear Ltd [2022] and Hashmi v Lorimer-Wing [2022] are both High Court cases and therefore both cases have the same level of legal authority; however, it seems clear that the judgment in Re Active Wear Ltd [2022] will be cited by solicitors when interpreting and applying the terms of the Model Articles, with the judgment in Hashmi v Lorimer-Wing [2022] perhaps being cited in cases where there is a bespoke article within a company’s articles of association which imposes different rules regarding directors’ decision-making.

It will be interesting to see if a case comes before a higher court, such as the Court of Appeal (Civil Division), and a clear judgment which firmly establishes that Model Article 7(2)(a) and (b) prevails over Model Article 11(2) is delivered.

In my previous article, I wrote about the ramifications of the judgment in Hashmi v Lorimer-Wing [2022] and the actions companies with sole directors should take in light of that judgment. In light of the judgment in Re Active Wear Ltd [2022], it appears that it is not necessary for the shareholders of a company governed by the Model Articles with a sole director at the time of incorporation, and which has never had more than one director, to amend that company’s articles of association, nor is it necessary for the shareholders to ratify the decisions of a sole director of that company. However, if a company, governed by the Model Articles, has entered into a state of having a sole director after previously having more than one director, the shareholders of that company should amend that company’s articles of association to make it explicitly clear that that company can be managed by a sole director, and the shareholders of that company should ratify any (purported) decisions made by that company’s sole director in those circumstances.

This article is for general information only and does not constitute legal advice. If you would like to discuss anything in this article, please get in touch. 

(All references in this article to any company or companies are to private companies limited by shares)

All private companies limited by shares must have articles of association; a company’s articles of association is effectively its ‘rule book’, containing the rules which govern how that company is run. The ‘Model articles for private companies limited by shares’ (the ‘Model Articles’) has been created as a ‘default’ set of articles of association; a company can adopt its own ‘bespoke’ articles of association, adopt the Model Articles with amendments made to it, or adopt the Model Articles without any amendments. A company must register its articles of association with Companies House. If a company does not register any articles of association, the Model Articles will apply to that company.

Section 154 of the Companies Act 2006 makes it clear that a private company limited by shares can have a sole director.

It had been understood that a company could be managed by a sole director with the Model Articles being its articles of association. However, the High Court case of Hashmi v Lorimer-Wing [2022] has established that this is not the legal position. In this case, court proceedings were instigated by Hashmi against Lorimer-Wing and a private company limited by shares of which Lorimer-Wing was the sole director (the ‘Company’), and the Company filed a counterclaim against Hashmi. The Company was governed by an amended version of the Model Articles; the Company’s bespoke Article 16 stated, amongst other things, that the quorum for a board meeting of the Company is two directors, and it amended Model Article 11(2) by imposing some different rules regarding the Company’s directors’ meetings.

Model Article 7, which applied to the Company, states:

“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.”

Model Article 11, which applied to the Company insofar as it had not been amended by the Company’s bespoke Article 16, states:

“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.”

Hashmi sought for the counterclaim filed by the Company to be struck out by the court. The court struck out the counterclaim. One of the judge’s reasons for striking out the counterclaim was that, as the sole director of the Company, Lorimer-Wing did not have the authority to direct the Company to file the counterclaim. In reaching this decision, the judge applied the legal principles governing the interpretation of written contracts. The judge decided that due to the Company’s articles of association stating that the quorum for directors’ meetings is two (Model Article 11(2) and the bespoke Article 16.1), a minimum of two directors would be required to direct the Company to file a counterclaim; a sole director in these circumstances could only appoint further directors or call a general meeting so as to enable the Company’s shareholders to appoint further directors in accordance with Model Article 11(3). The judge expressly stated in Hashmi v Lorimer-Wing [2022]: “…amendment is required for the Model Articles to permit for a single director to run a company, but consider that such amendment would need to include the deletion of Model Article 11(2).” This is contrary to a previous understanding that Model Article 7(2)(a) and (b) prevails over Model Article 11(2), enabling a sole director of a company governed by the Model Articles to manage that company; the judge in Hashmi v Lorimer-Wing [2022] even recognised: “…Practical Law was more definitive in saying that Model Article 7(2) should prevail over Model Article 11(2)…”

Whilst the judge reached a different conclusion in Hashmi v Lorimer-Wing [2022], arguably, the very purpose of Model Article 7(2)(a) and (b) is to accommodate companies which are governed by the Model Articles and have a sole director at the time of incorporation, or subsequently enter into a state of having a sole director, so that such sole directors in these circumstances can manage the companies they are directors of “…without regard to any of the provisions of the articles relating to directors’ decision-making” (Model Article 7(2)(b)), such as those contained in Model Article 11, and so Model Article 7(2)(a) and (b) should prevail over Model Article 11(2). Whilst the judge reached a different conclusion in Hashmi v Lorimer-Wing [2022], arguably, a company’s articles of association should have to contain an express article stating that that company must have at least two directors, in addition to Model Article 11(2), in order to prevent Model Article 7(2)(a) and (b) enabling a sole director to manage that company.

Whilst the presence of the Company’s bespoke Article 16 might have affected the judge’s reasoning in relation to Model Article 7 and Model Article 11 in Hashmi v Lorimer-Wing [2022], it is clear that this judgment applies generally to the interpretation of Model Article 7 and Model Article 11.

There are multiple ramifications of the judgment in Hashmi v Lorimer-Wing [2022]. If a company is to have a sole director at the time of incorporation, a version of the Model Articles which amends or deletes Model Article 11(2) to explicitly enable that company to be managed by a sole director should be adopted. The shareholders of a company governed by the Model Articles which has a sole director should amend or delete Model Article 11(2) to explicitly enable that company to be managed by a sole director. The shareholders of a company with a sole director, governed by the Model Articles, should ratify any (purported) decisions taken by its sole director to prevent the validity of that director’s decisions being questioned in the future.

This guide is for general information only and does not constitute legal advice. If you would like to discuss anything in this article, please get in touch.