A company's articles of association are the document which governs how the company may operate and how decisions are taken. Many companies choose to adopt the default Model Articles or to adopt bespoke articles which are similar to or incorporate parts of the Model Articles.
The case of Hashmi v Lorimer-Wing has highlighted a potential inconsistency between articles 7(2) and 11(2) of the Model Articles. In Summary, article 7(2) permits a sole director to take decisions alone, provided that there is no requirement in the articles for the company to have more than one director. The Model Articles do not set a minimum number of directors, but article 11(2) states that the quorum for a meeting of the directors shall not be less than two unless otherwise fixed. The ruling in Hashmi v Lorimer-Wing essentially provides that:
- Article 11(2) if adopted means that the relevant company must have a minimum of two directors; and
- a sole director of such company therefore may only act to appoint an additional director or convene a general meeting in order to do so.
Until this judgment, the widely accepted view of the Model Articles has been that article 7(2) overrode article 11(2) and therefore a sole director was able to act without the need for a quorate board meeting and that article 11(2) did not impose a minimum requirement of having two directors. When the Model Articles were introduced in 2009, there was much debate over the interplay between articles 7(2) and 11(2) which led to contemporaneous guidance being published by the Department for Business, Innovation and Skills supporting the position that there was no minimum requirement in the Model Articles for the number of directors in a private company.
The potential implications of this are illustrated by Hashmi v Lorimer-Wing where the ruling meant that the affected company's counterclaim was struck out by the Court on the basis that the sole director did not have power under the company's Articles to bring the counterclaim.
Unless or until the decision is reversed, or Parliament legislates to resolve the issue, the ruling in Hashmi v Lorimer-Wing is the current legal position and therefore we recommend all affected companies take steps to appoint a second director or to amend their articles of association.
This new interpretation of the Model Articles will affect a large number of companies and we are able to advise on the most appropriate course of action for your particular circumstances. We also have standard documents to make necessary board appointments and/or change the relevant provisions in the articles to ensure the costs of remedying the issues created by the ruling are kept to a minimum.
If you would like to speak to us, please contact a member of the corporate team who would be happy to help.