The end of March saw the case of Hashmi v Lorimer-Wing enter the High Court in England. A dispute arose when the company tried to submit a counterclaim against a claim brought against the company for unfair prejudice. The judgment focused on the relationship between Model Article 7 (Directors to take decisions collectively) and Model Article 11 (Quorum for directors’ meetings), as well as a bespoke article drafted by the company, Article 16, which set the quorum for board meetings at two directors.
Model Articles are the default set of rules regulating how a company operates, unless modified or excluded. Such rules include, for instance, processes for appointing/terminating directors and organising meetings.
- Article 7(2) (Model Articles) states that where a company only has one director, no provision of the Articles requires it to have more than one director, the general rule relating to decision-making by directors does not apply, and the sole director may take decisions without regard to any of the provisions of the Articles relating to directors’ decision-making.
- Article 11(2) (Model Articles) 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, and unless otherwise fixed it is two.
- Article 16 (Bespoke Article): The company in this case had implemented a bespoke Article which modified Article 11(2) and required a quorum for board meetings of two directors.
Here, the Model Articles effectively contradicted the bespoke article. However, the interaction between Article 11(2) and Article 7 of the Model Articles has itself been historically unclear.
What was decided?
On the basis that only a sole director had permitted the counterclaim, it was successfully argued that the decision was invalid as the company’s Articles (both Model Article 11 and bespoke Article 16) required a quorum of two directors. Consequently, the sole director did not have authority to approve the counterclaim on the company’s behalf.
It is unclear whether the inclusion of bespoke Article 16 was the persuasive reason in determining that the sole director’s decision was not binding in this case, or if the Model Articles’ own contradiction would have been enough to stop the sole director from acting independently.
Either way, it is hoped the government will amend the Model Articles so that there is less confusion around the rights of sole directors.
Given the present uncertainty, we have recommended some steps which sole directors may wish to take to protect themselves.
What should sole directors do?
The judgment suggests that sole directors may want to amend their articles to clarify that Article 11(2) is not a provision requiring the company to have more than one director within the meaning of Article 7(2)(a). However, this will not impact on decisions made under the Model Articles prior to any such amendment.
If a company has historically operated with only one director, it may wish to seek advice on the validity of any historic decisions taken by the sole director and whether such decisions are capable of being ratified.
If you have any questions, speak to a member of the Blackadders Corporate & Commercial team working in Aberdeen, Dundee, Edinburgh, Glasgow, Perth and across Scotland.
Alex Peddie, Trainee Solicitor
Corporate & Commercial
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