In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.
Board meeting
iStock_monkeybusinessimages_board_meeting

Court ruling could affect companies with a sole director

by

Companies with a sole director using default model articles may be invalid, according to a recent court judgment.

14th Jun 2022
In association with
Save content
Have you found this content useful? Use the button above to save it to your profile.

Most accountants will have clients who are sole directors of a limited company. In many cases, the accountant may have set the company up for the client, or a company formation agent may have done it for them.

One requirement for all private companies limited by shares, is that they must have articles of association, which are essentially a set of rules about how the company will be run. There is a default standard or “model form” for these articles, which is prescribed by the Companies (model articles) Regulations 2008. Unless a company is set up with bespoke articles then the model articles apply. 

A company’s articles will often contain (among other matters) provisions about minimum and maximum numbers of directors for the company, and the quorum – the number of directors required to be present at a meeting for the proceedings at the meeting to be valid.

However, if the company was set up with just one director and used the default model form articles, a recent High Court ruling may mean that these companies (or their accountants) need to check that they don’t fall foul of a recent judgment. 

Open to challenge

The ruling in the case Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) suggests that decisions taken by sole directors of companies set up with the default model articles may be invalid and could therefore be open to challenge.

Adrian Smart, director at First Corporate Law Services explained: “There are a number of reasons why the model form articles may not be suitable, and a recent court case has highlighted one such issue, the number of directors needed to form a quorate meeting.”

The judgment in the recent case was that model article 11(2) actually amounts to a requirement for a quorum of two directors. So two directors must be present for the meeting to be quorate.

Effectively this means that a company that uses the model articles (unamended) must have at least two directors to manage its business and make decisions about the company.

Impact of the decision

The impact of this decision could have wide ramifications for many sole director businesses. Smart continued, “We’ve heard of companies being unable to sell or buy a property, or take out a loan because effectively the sole director does not have the authority to make the decision.”

Faced with these issues there are a number of solutions that a company can take. They could appoint another director to the business, though then both the directors would need to approve all future (and previous) decisions made by the company.

This may not always be convenient or desirable, so another option is to replace the default articles with bespoke articles that specifically allow the sole director to make decisions for the business.

Smart said: “Under the Companies Act 2006 a company can choose not to use the model articles at all, or to use some of the model form articles and to amend others. If a private company wants to have a sole director it may do so, but will need to have specially prepared articles, or at least to amend these provisions of the model articles.

“We’ve worked with many accountants to help identify which of their clients are affected, and then, where necessary, produce the bespoke articles to allow the company to continue with a sole director.”

The court’s decision means that accountants should ensure that any sole director firms (of which they may be one themselves) take steps to check whether the articles of association need to be amended, and also whether some or all of the previous decisions of those directors need to be ratified.

 

First Corporate Law Services offer company law and company secretarial services, including a review service to check if a company is affected by the ruling, plus advice and support on adopting bespoke articles. Get in touch for further information.

 

Tags:

Replies (18)

Please login or register to join the discussion.

avatar
By Hugo Fair
14th Jun 2022 19:08

I was wondering as I read it why there was a full article on this storm in a teacup ... especially since it's hardly news, and most companies 'caught' by the issue will remain blissfully unaware of it forever (as it doesn't stop them carrying on with things day-to-day in their usual way)
... and then I got to the punch line "accountants should ensure that any sole director firms .. take steps to check whether the articles of association need to be amended".
Oh, what a surprise ... that's the 'service' being sold by the virtual author!

Thanks (6)
Replying to Hugo Fair:
avatar
By Paul Crowley
15th Jun 2022 11:15

Having had time to read some of this I now agree
This article is misleading and an advertisement for someone selling services that are not needed.

Thanks (4)
avatar
By Paul Crowley
14th Jun 2022 20:30

Daft decision
Default settings need to be rewritten if it is the case that a single director is both permissable and normal practice.
I have been looking to get second directors appointed more for easy operating on continuity and handling of sudden death and incapacity issues.
Gosh, looks like I preempted a problem noone knew they had.

Thanks (5)
Replying to Paul Crowley:
avatar
By Winnie Wiggleroom
15th Jun 2022 06:55

Yes we have done exactly the same, obviously the pandemic highlighted it, but what really brought it to my attention was a sole director client who had a company that held an expensive commercial property and a large bank balance, when he suddenly died it took his wife over 9 months to get control of the funds.

Thanks (4)
Replying to Winnie Wiggleroom:
avatar
By Paul Crowley
15th Jun 2022 11:07

The issue that hits quickest is the sole director with unconnected employees and a viable business.
Employee and business both gone before things can be put in order.

Thanks (0)
avatar
By Calculatorboy
15th Jun 2022 09:25

Don't panic I'm sure it will be reviewed and clarified...otherwise all decisions by sole directors using model articles would be ultra vires .
It was a deputy judge comment on a bespoke article 16 requiring a quorum of 2 , therefore he considered 7 (2) didn't apply and so article 11 would have same effect.
Whatever happened to the simple English campaign ?

Thanks (2)
avatar
By Calculatorboy
15th Jun 2022 09:31

Advising client sole directors simply to appoint a "patsy " director is not a good idea .You have been warned .

Thanks (2)
avatar
By Justin Bryant
15th Jun 2022 09:57

This is a very misleading article as it does not mention the Duomatic principle or this re sole member companies (previously s370A CA 1985) which will negate this potential problem: https://www.legislation.gov.uk/ukpga/2006/46/section/318

It would be better of course if the author was a company law expert, as it is a complex area. See: https://beckassets.blob.core.windows.net/product/readingsample/11766797/...

Thanks (3)
Replying to Justin Bryant:
avatar
By Paul Crowley
15th Jun 2022 14:34

Shame on you Justin
You have negated the whole point of the article

The advertiser offering services will be miffed

One of my prior comments on the accounts published at companies house for Nomisa Solution Ltd miffed the powers that be and my comment was deleted with a written warning (email).
But good news Nomisma submitted ammended accounts using what looks like different software

Thanks (4)
Replying to Paul Crowley:
avatar
By Justin Bryant
15th Jun 2022 15:06

Ah yes. But credit to Aweb for not deleting my above comment (yet).

Thanks (1)
Replying to Justin Bryant:
avatar
By Paul Crowley
15th Jun 2022 15:10

Yes, that is a yet

Thanks (1)
avatar
By Tim Robinson
15th Jun 2022 10:41

What about all the sole-director companies I created using a company formation agent? That agent would have formed a company in the knowledge of it having only one director but using model articles.

Surely the easiest way to address this issue is to change the articles?

Thanks (1)
paddle steamer
By DJKL
15th Jun 2022 11:16

I suspect there could be issues with banks who have lent to a single director company, most bank lending to companies involves a board minute by the company. It may be the bank legal teams will decide as policy they are vulnerable and start a process of review/tidying up.

(banks can be a pain, we once had to redo all our standard securities with them because they decided the ones done five years previously were no longer legally acceptable, that was not £10k well spent)

Thanks (0)
By Silver Birch Accts
15th Jun 2022 14:53

This did not appear to be a problem during Covid, when text lending by banks was endemic. The borrowers inluded many sole director companies.

Thanks (1)
All Paul Accountants in Leeds
By paulinleeds
15th Jun 2022 15:12

I note the helpful comment, and weblink by By Justin Bryant:

"CA 2006, s 318 - Provision for single member companies is now to be found in CA 2006, s 318, which provides that in the case of a company limited by shares or guarantee and having only one
member, one qualifying person present at a meeting is a quorum and thus a valid meeting. 30
In all other cases two qualifying people must be present, subject to the proviso that they
must not both represent the same member. "

So, I assume the law (CA 2006) takes preference over default model articles (requiring two people to be present).

You could of course still have the position with a sole director who is NOT a sole shareholder and therefore a quorum of two is required.

Thanks (1)
Replying to paulinleeds:
avatar
By Justin Bryant
15th Jun 2022 17:07

Yes; but that's when the Duomatic principle (or actual subsequent ratification by members) steps in.

Thanks (0)
avatar
By Pavilionaire
17th Jun 2022 09:44

I can see that if the default moved from one director to a minimum of two then that would involve a spouse / children that would then - in all likelihood - lead to incoming being diverted from the 'sole director'. This would surely result in a reduced tax take for the Treasury?

It makes me laugh when I hear the government saying there is a record number of people "in employment", whilst we also hear our productivity is some of the lowest in Europe. How many hundreds of thousands of those "in employment" are family members drawing remuneration for making little / no contribution? Any move to a requirement for multiple directors will only make this worse.

Thanks (0)
avatar
By Justin Bryant
04th Jul 2022 15:39

Also, I thought a director had actual (as well as ostensible) authority to manage the affairs of the company, including causing it to enter into contracts - such as a contract of retainer with solicitors. If every contract requires a board resolution then a lot of incorporated businesses are doing it wrong. If not every contract requires a board resolution but some do, how do you know which is which?

Thanks (0)