A recent High Court case means that sole director companies with Model Articles (the default constitutional document that many use on incorporation) need to take urgent action.
Otherwise, all their decisions to date and going forward could be challenged as being legally void.
Background
The case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) considered the interaction and interpretation of Model Articles 7(2) and 11(2) where a sole director with model articles is making decisions.
Model Article 7(2) states that:
“if the company only has one director, and no provision of the articles requires it to have more than one director …. the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”
Model Article 11(2) 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.”
There has been an ongoing debate about how these two articles should operate in practice for single director companies.
Many took the view that Article 11(2) was irrelevant in such circumstances (on the basis that it simply dealt with the quorum requirements for company meetings, rather than imposing a minimum number of directors for a company generally) and that Article 7(2) took precedence and, consequently, allowed sole directors to take decisions and legally operate their business.
However, the judgement in the above case stated that Model Article 11(2) imposes a legal requirement for a quorum of a minimum of two directors for all decision-making.
Implications
This High Court judgement has significant implications for single director companies using unamended Model Articles and, effectively, means that
they cannot legally run their companies and any decisions taken by them could potentially face legal challenge and be found to be void.
This would also impact all dormant companies.
Urgent Action
In light of the above, it is now recommended that a
ll sole director companies with unamended Model Articles
should undertake an urgent review of their Articles.
Whilst the appointment of a second director would provide a solution going forward, previous decisions would remain open to legal challenge.
Accordingly, t
he best route is for the Articles to be amended and, in any event, most sole directors will not wish to appoint a second director for their business.
Urgent Next Steps
Newshams Tax Advisers can review your Articles and provide you with a complete service offering which includes:
· reviewing and amending your company’s Model Articles to ensure they do not fall foul of the High Court judgement;
· drafting the necessary resolutions to make such amendments and adopt the new Model Articles; and
· submitting all the relevant filings at Companies House.
We also need to ensure that your past decisions can be ratified because, otherwise, they also risk the potential of being legally challenged.
The resolutions referred to above include such ratification provisions.
This should then remove any ambiguity as to a sole director’s decision-making powers and help prevent any subsequent decisions from being at risk of a legal challenge.
Contact
Newshams Tax Advisers today to ensure your decisions can be legally made as follows:
Email: enquiries@newshams.com
Tel: 0800 211 8657
We look forward to helping you.
Related
