What is it?
By law, every private limited company registered in the UK must have a minimum of one appointed director that is a natural person (i.e. an individual).
The Model articles for Private Companies contain provisions which have long been understood to allow for sole director decision making; but a recent court case, Hashmi v Lorimer-Wing , has suggested that the model articles for private companies are not suitable for companies with a single director. As a result, it is advisable to have a minimum of two directors appointed.
Who is it for?
All UK based private limited companies, with a sole director appointed.
How does it work?
Under the Companies Act 2006, all private limited companies must ensure that there is at least one director appointed at all times, to enable important company decisions to be taken and routine documents such as the annual accounts and confirmation statement to be signed.
Article 7 of the model articles states “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”. However, the two exceptions to this are where the company only has one director or where there is no provision in the articles requiring the company to have more than one director.
The basis of Hashmi v Lorimer-Wing was that there were two clauses within their articles which contained provision for a set number of directors to constitute a quorum. Article 11.2 (which is standard within the model articles) which states “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 a bespoke Article 16 which stated the company should have “…two directors one of whom must be an Investors’ director (if appointed).
Until now, it has long been understood that article 7 supersedes article 11.2 if there is only a single director, however it was decided in this case that the company’s articles prohibited it from making decisions with a sole director, as clauses 11.2 and 16 gave specific requirements to have a minimum number of two directors. It is not yet clear whether the judge’s decision was influenced by the bespoke provision, or whether clause 11.2 was deemed to be constituting a minimum requirement of two directors.
This ruling on this case constitutes a precedent for the future and therefore it is possible that future court cases could reference this as an argument that sole director decision making is not lawful.
What should I do next?
You need to consider whether your current articles contain any specific provision for a minimum number of directors, bearing in mind that clause 11.2 in the model articles could now be construed as providing this requirement. You should then consider one of two options.
- Appoint an additional director to satisfy the minimum number to achieve a quorum.
- Amend the company’s articles of association to either remove a reference to the requirement for a minimum number of director or amend to show a quorum being established by a sole director.
In either case, it is important to note that any updates would not apply retrospectively, so you will also need to consider preparing shareholder resolutions to ratify past decisions, to avoid any possible argument that they were not taken within the scope of the law. Companies where the sole director is also the sole shareholder will not need to ratify past decisions as they have already signed their agreement, but they should consider amending their articles to continue to allow sole director decisions if an additional shareholder is appointed.
If you have any queries regarding the above or have any other questions, please do not hesitate to contact Charlotte Leslie on 01865 261119 or via email.
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