Sole Director and Model Articles: What Are the Issues and How to Solve Them?

Many limited companies within the UK adopt the model articles when they don’t wish to create a bespoke company’s articles of association. This used to be a normal and legally sensible act until recently when a judgment from a high court case questioned the use of model articles by companies with sole directors.

The challenge is that sole directors within a company are not legally allowed to make vital decisions due to some discrepancies in the model articles.

In this guide, you will learn what model articles are, how the court judgment went, the effect it has on companies with a sole director using model articles, the arising issues and how it can be resolved and so on.

Articles of Association and the Model Articles

Articles of Association are considered as the constitutional document of a company that guides the affairs, internal management and governance of a company. It is a vital document that dictates how decisions should be made, stipulates the role of members and directors of the company and so on.

Every limited company must have and function in accordance with the rules of this document. As such, the document must not contain elements that contradict or conflict with one another.

When a new limited company is formed, a bespoke article of association would usually be adopted. This means that the default articles have been varied in some way or adjusted to suit the needs of the new company.

The default articles are known as the model articles which are regarded as the standard articles of association laid down by the Companies Act. So if a company doesn’t wish to create their own article of association,  they could simply use the model articles.

While many companies have their articles of association, there are still others using the model articles. Although there hasn’t been any issue in the past years concerning the usage of model articles by sole directors, however, in recent times, there seem to be a lot of issues with it.

Background to the Issue – Hashmi v Lorimer-Wing

Many sole directors of a limited company follow the approach of a model article which was generally considered as an appropriate move. However, in the recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), the suitability of the model articles used by sole directors was questioned.

The court ruled that a sole director cannot make board decisions on behalf of a company if the company is governed by the model article. And more so at least two directors are required for board decisions to be made.

In the case of Hashmi v Lorimer, the high court considered the provisions of the model articles 7 and 11 which guide the decision-making procedures of directors. The Model article 11(1) provides that for a company to make a decision in a board meeting, then a quorum must be formed.

In model article 11(2), it is stated that a quorum can be formed by directors from time to time for every board meeting, however, the quorum must not be less than two. With this provision, it is expected that a sole director is not expected to make a decision alone in a board meeting as a quorum is needed.

The Model article 7(2) on the other hand states that for a company with a sole director (and there is no requirement for more than one director in its articles of association), the general rule won’t be considered, and as such a director could make a decision for the company without regarding the other provisions available in the articles of association concerning decision making of directors.

The general notion for most companies who have adopted the model articles is that the model article 7(2) provisions have overruled the quorum requirement in model article 11(1) and (2) and as such a board meeting can be carried out by a sole director and decisions can be made alone in the meeting without a quorum. However, in the case of Hashmi, there have been changes to this.

The judge in Hashmi ruled that if a company has adopted a model article, then it requires at least two directors to manage the company and more so make decisions in board meetings. The court ruled that the provisions in model article 7 cannot overrule that of 11.

Further along, the decision made in the Hashmi case has brought about another consensus. And as such the question still remains if the decisions made by sole directors of a company that adopted a model article were valid and reliable since the quorum requirements were not met. Apart from that, this has also raised some issues for sole directors adopting a model article.

What are the Consequences of this Decision to the Sole Directors?

After the Hashmi case, there were a lot of arguments on whether the sole director of a company could make decisions for the company or not. As it is, it is gradually becoming impossible for sole directors adopting a model article to make some management decisions for the company since the quorate requirements of two directors are needed.

This would in the long run have some effect on the company and how it deals with other stakeholders. In fact, some banks today are paying more attention to companies with sole directors. In cases where the companies wish to get some loans, the articles of association are being referred to see if the discrepancies in the provisions have been amended.

This is because the new rulings from the high court make it illegal for a sole director to enter into legal binding with other stakeholders unless adjustment has been made to its model articles and changes are made to the provisions regarding the director’s decision-making.

Before the Hashmi case, it was a general notion that model article 7(2) overrides model article 11(2) and with that sole directors can make some management decisions in the company. They can change a company’s registered address, appoint an accountant, enter into legal contracts with stakeholders and so on.

What are the Issues?

Following the judgment of the court, there are potential problems arising concerning sole directors in companies that adopt the model articles. Here are some of them.

• Firstly, it could be difficult for sole directors to make certain decisions within the company. And even when they do, it could be considered void or invalid by other stakeholders.
• It could be potentially hard for a company with a sole director to source for lenders as lenders could require that a company have up to two directors in order to enter legal binding with them.
• When new shareholders join a company with sole directors, they could question the validity of all the decisions made by the sole directors in the previous years.
• Agreements reached by sole directors and lenders or suppliers and other stakeholders either in the past or present could be categorized invalid or void.
• Getting investors for a company with a sole director could be difficult.

How to solve them

For companies who have adopted the model articles, there are a number of steps you can follow to ensure that your company isn’t affected by this new judgment or rule. Here are some of the available solutions.

1. Amend the company’s article of association

The first solution you should be considering as a company with one director is the amendment of the company article of association. This should be done to remove or nullify the conflict in the model article 7(2) and 11(2).

In a situation where the sole director company only has one shareholder, then a resolution can be passed in a general meeting to make amendments to the articles of association. However, if the company has two or more shareholders, then a special resolution requiring at least 75% of shareholder's support will need to be passed.

This can be done in a shareholders meeting or passed in writing and it should be sent to the Companies House within 15 days in which it was passed.

You should therefore note that the amendments made should be done in such a way that model article 11(2) should allow one director to form a meeting quorate since it has only a sole director.

2. Appoint a second director

In situations where your company can afford to appoint another director, then it should consider this solution. With that having two directors would enable them to easily form a quorum during meetings and as such meet up with the provisions in model article 11(2).

You can decide to appoint a new person to join the company or promote anyone else from within the company to the director position. With this, they should be made aware of the legal obligations that are involved. You must also ensure that they meet up with the basic requirements of appointing a director and as such they must be up to 16 years of age, must not be an undischarged bankrupt and must not be a previously disqualified director.

3. Appoint another company as the director

Apart from appointing a new human director, you can also consider appointing another limited company as the second director of your company. You could look out for another company that will be interested in being a director of your company. Alternatively, you could form another limited company and use it as your first company’s director.

You should however note that you would be required to make annual filings and confirmation statements for the new company irrespective of the ones you do for the first company.

4. Ratify the Sole director's past decision

Even when you appoint a new director or make amendments to the article of association, the fact remains that the previous decisions made by the sole director can be questioned in the future. With that, you need to ratify all the past decisions made by the sole director.

To then make the ratification, shareholders are expected to reach an agreement in a written resolution. The written resolution must explain that the decisions made by the sole directors in the past have been ratified even when the decisions were made following the model articles which require at least two directors to form a meeting quorate.

Are Sole Shareholders Also Affected by the Hashmi v Lorimer-Wing Judgment?

No, sole shareholders are not affected by the judgment in the Hashmi case. There is no provision on the model articles or any other legal documents requiring two directors to form a quorum before a meeting can be held. With that, a single shareholder within a company could effectively make decisions for the company.

Will there be Future Changes to this Judgment?

There had been a lot of arguments on whether the decision made by the high court would be changed in the future. No one is sure of this and it is most likely that this decision won’t be reversed. With that, it is important for all limited companies with a sole director to not only ratify the past decisions made within the company but also to consider making amendments to the Articles of Association or appointing a new second director.

Conclusion

As a limited company with a sole director, making amendments to the article of association or appointing a new director are good ways to ensure that you are not affected by this judgment. While it might not be so easy to adjust to this new rule, it’s worth doing the right thing to ensure that your company’s decisions remain valid. Do you have any questions about the sole director and model articles? Kindly contact one of our experts here for help today.