It is very common for small companies to be run by a single Director. It is equally common these days for the Model Articles, the default form of Articles of Association, to regulate such companies. either in full or as adapted by bespoke Articles. A recent court case (Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has however suddenly made decisions sole Directors have made in the past. e.g. as to the issue of dividends, or, in this case, the filing of a Counter Claim in a court case, invalid. No lawful decisions can be made until changes have been made to the Articles of Association or the appointment of a second Director. But even if a second Director is appointed, without a change in the Model Articles, the company remains at risk should the new Director leave or die. So, quite apart from the problem that a second Director runs the risk of the company hitting a stalemate when decisions are not agreed. Making changes to the Articles is the sensible way forward.
Background
The case is covered widely by law firms on their websites. For more detail than is contained here, just search the case name of Hashmi v Lorimer-Wing
Directors are the people who run the company. Briefly, and without giving a lecture on the law, Article 7(2) of the Model Articles permit a company to be run by a single Director if, and only if, there is no requirement in the Articles of Association for it to have more than one Director.
Separately, Article 11 of the Model Articles states that the quorum for a meeting of Directors must be at least 2.
It was commonly believed by just about all company lawyers that so far as companies run by a single Director are concerned, whose Directors did not hold meetings as there was no-one else to call to a meeting, provisions about what qualifies for a quorum of a meeting were, therefore, irrelevant. It was certainly not believed that this rule could amount to a requirement to have more than one Director on the Board.
However that is not what was decided by the court. The decision taken by the sole Director in this case that was ruled invalid was the decision to file a Counter Claim in a case against him and thus, with the Counter-Claim struck out, it put the Director in a weakened position.
The Solution
The obvious quick fix is to appoint a second Director. However that may not be ideal since it runs the risk of stalemate on decision making (although the ‘Mr 2 Percent ‘solution might assist. But also, having two Directors may not be the total solution since the company could return to a sole Director situation as soon as a Director resigns, or passes away.
By far the better solution is to make changes to the Articles to include specific permission for the company to be run by a sole Director. Bear in mind that if there are non-Director shareholders, any change to the Articles requires a vote of more than 75% in favour.
When considering changes to the Articles , it is a good opportunity to ensure shareholders/Directors fully understand all the provision and consider making other changes that may be beneficial.
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