Uncertain times for Sole Directors

Recent case law has led to a potentially troubling position for Sole Directors and Corporate Practitioners regarding the ability for Sole Directors to make and pass decisions on behalf of the Company. The recent case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has called into doubt the relationship between Article 7 (Directors to take decisions collectively) and Article 11 (Quorum for directors’ meetings) of the Model Articles when there are less than required quorum for a directors’ meeting (most often a minimum of two).

Article 7:

"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."

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Article 11:

"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."

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The position prior to this case was that contained within the Model Articles, Article 7 operates instead of Article 11. This is what allowed a Sole Director to act without being able to fulfil the quorum required.

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In Hashmi v Lorimer-Wing, a new, bespoke article was introduced into their Model Articles, Article 16:

"16.1 The quorum for meetings of the Board shall be two Directors one of whom must be an Investors' Director (if appointed) and one the Executive (if appointed as Director) unless such Investors' Director or Executive is unable to attend a Board meeting and has confirmed in writing (which may be by email) that he is satisfied that the Board meeting in question is quorate without him being present.

16.2 If a quorum is not present within half an hour from the time appointed for a board meeting because the Investors' Director (if appointed) or Executive (if appointed as Director) is not present, the Board meeting shall stand adjourned to the same day in the next week at the same time and place or to such other day and at such time and place as the Directors may determine and if at the adjourned Board meeting a quorum is not present within half an hour from the time appointed therefor because the Investors' Director (if appointed) or Executive (if appointed as Director) is not present, provided there are at least two Directors present then those Directors shall represent a quorum.

16.3 Model Article 11.2 shall be modified accordingly."

When disagreements arose between the two directors (leaving to one subsequently being removed) an unfair prejudice petition was brought against the company. The Company served a defence and counterclaim.

It was found by the court that the Company could not bring a counterclaim as they lacked the power under the Articles to commence the proceedings (they were unable to fulfil the quorum requirements).

This was a surprising result as it found the introduction of the bespoke Article 16 had not only upset the balance between Articles 7 and 11 but had actually found that Article 11(2) is not disapplied, as per Article 7(2).

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This can cause a lot of uncertainty with Sole Directorships, especially those that have had more than two directors but subsequently dropped below that. This judgement has moved away from current industry practices and has led to uncertainty as to what powers a Sole Director may have.

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There is hope however. In Re?Active Wear Ltd?[2022] EWHC 2340 (Ch)?(Active Wear), the courts found that where there is a Sole Director, and no other provisions including or requiring more than one singular director (i.e no bespoke articles) that Article 7(2) acts as a precedent over article 11(2), thus restoring harmony.

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Going forward, it may be that Sole Directors need to amend their Model Articles to disapply the quorum provisions and grant them sufficient power to make decisions on behalf of the Company. This may be wise if there are any substantial transactions taking place or going to take place in the future.

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If you are concerned about your position as a Sole Director, please give our expert team a call on 01206 5345700 or email us at [email protected].