Sole directors’ decisions may be open to a claim of invalidity where their company has adopted Model Articles following a recent judgement of the UK courts.
The issue:
The High Court in the case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) decided that certain provisions of the Model Articles for private limited companies are in conflict where a company has less than two directors.
As a result, any actions taken by a sole director could be deemed ultra vires or outside the scope of the sole director’s powers.
What are the Model Articles?
Under the Companies Act 2006, all companies are required to have articles of association which set out the rules that directors and shareholders must follow when running their companies. “Model” articles of association are the standard default articles a company can adopt from incorporation or later on in a company’s life time if they choose.
Our thoughts:
The judgement in this case runs against best practice in legal spheres since the Model Articles became available to us following the enactment of the Companies Act 2006 and has, therefore, led to much debate.
It is unclear whether the judgement will stand or be set aside in a future case, but in the meantime it leaves sole directors open to the risk of their decisions being challenged, especially if disputes arise.
For example, if a sole director signs a supply agreement on behalf of a company which has Model Articles and there is then a dispute over the terms of the agreement or how it has been performed, is the other party going to claim that the director could not validly sign the supply agreement in the first place?
The solution:
Due to the uncertainty that this court decision has created, we would suggest that any company which has Model Articles and only one director should take one of the following actions as soon as possible:
- Appoint a second director; or
- Adopt new articles of association on similar terms to those of the Model Articles, but which permit a sole director to act on behalf of the company in all situations.
Grunberg & Co Limited have a very experienced team who can assist you with the changes above, so please get in touch if you think you will be affected by this issue.
