Calling all Sole Directors – you may want to read this!
Ok, before I start, this isn’t exactly ‘breaking news’. It actually comes from the judgement in the case of Hashmi v Lorimer-Wing [2022]. The date of this case gives a clue to just how ‘breaking’ this news is!
In fact, as I explain below, this relates to an issue that has been around for 18 years.
Yet, I still see problems arising from this regularly, as it still affects a lot of sole directors.
When setting up a new company, be it a start-up, or incorporation of an existing business (a sole trader for example), you must file at Companies House a copy of the rules that govern the company – the Articles of Association.
This covers important things like:
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how the company makes decisions
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how the company can issue more shares
When starting or incorporating a business, the last thing you need is the delay and cost of having bespoke Articles prepared. Most people in this situation do not have any special requirements and they just want to run the company under the ‘normal rules’.
Well thankfully, when drafting the Companies Act 2006, the government included a set of ‘Model Articles’. This is essentially a set of ‘normal rules‘ for a company.
All you have to do is say that the company will ‘adopt the Model Articles’ and job done, you can move on!
Not at all surprisingly, lots of new companies do just that.
So what’s the problem?
Well, let’s say you are a sole director, and you have ‘adopted the Model Articles’.
Article 11(2) states that: “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….”
In accordance with the Model Articles – all lawful decisions of the company are made by majority decisions at director’s meetings (or unanimous decisions by directors that would form a quorum).
If those meetings and unanimous decisions can only be made by a minimum of 2 directors – this means that a sole director operating under the Model Articles cannot make any decisions on behalf of the company!
You may be wondering if this has any relevance considering it has been there for all to see for 18 years! It was generally thought that this anomaly could be ignored as Article 7(2) states:
“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”
You can see the problem here! Article 11(2) does specifically require the company to have more than 1 director, and so Article 7(2) does not really help.
In the Hashmi case, the High Court decided that a sole director operating under the Model Articles could not make decisions on behalf of the company. This would mean that a sole director cannot enter the company into an agreement by signing as a director on behalf of the company.*
The biggest fallout from all of this that I have seen is from banks, with respect to lending. If a sole director (of a company with the Model Articles) signs a mortgage deed on behalf of his company – who are borrowing a sum of money for the purchase of a property, arguably that company has not agreed to the mortgage, the bank has sent the money despite the fact the mortgage deed has not been executed.
This is because the company’s rules state that decisions must be made by a quorum of directors and that the minimum number of directors is 2 – and only 1 director made the decision.
There could be problems if the company defaults on the repayments, having not formally agreed to the terms of the mortgage!
So how is this still relevant?
In the last month alone, I have had to deal with 3 sole director companies (with the Model Articles) as they sought finance. The bank cannot lend unless there is a second director, or the Articles are changed so that 1 director can bind the company. All that is required is an amendment to Article 11.
We can easily fix this for you so that all past decisions by the sole director, and all future decisions are lawful. Please get in touch for a free assessment of your company – as to whether the sole director has the authority to make decisions on behalf of the company.
In Summary:
“It is commonly understood that ‘A minimum of two directors must be present at any board meeting, unless the company has only one director, in which case that single director is permitted to make decisions independently.’
Put simply, it is widely accepted that Article 7(2) takes precedence over Article 11(2).”
*The Articles in the Hashmi case also included an additional bespoke Article 16. It is not known to what extent that additional Article influenced the decision. It could be that the courts make a different decision on another case where the Model Articles had not been amended – but who would be brave enough to take that to court now?
If you require any advice or assistance in relation to any of the above, please contact our Head of Corporate & Commercial, Paul Edels at paul@prosperitylaw.com or on 0151 958 0057.
