Sole Directors – You may be acting unlawfully!

A recent High Court decision has overturned the accepted wisdom that most companies can operate with a sole director. It could mean that decisions you have made as a sole director are open to challenge, and that without remedial action you cannot continue to operate the company as a sole director.

We offer a fixed fee service to address the issue, details of which you will find below.

Background

Every company has a set of rules which allow directors and shareholders to control the company.  Those rules are called “Articles of Association”.  The default set of rules for a company are the “Model Articles”.

If a private limited company uses the Model Articles, or a bespoke set of articles prepared by your solicitor, accountant or company formation agent which are fundamentally based on the Model Articles, then you are likely to be subject to the following key articles:

• Art 7(1), which sets out as a general rule that decisions of the directors can only be made either (i) at a meeting where a quorum is present, or (ii) by all the directors agreeing to a decision outside a meeting, so long as they would have formed a quorum at a meeting.
• Art 7(2), which sets out an exception that where there is only one director and nothing in the articles requiring the company to have more than one director, then that sole director can make decisions on his own.
•  Art 11(2), which sets the quorum for a director’s meeting at two, or such higher number as the directors decide.
• Art 11(3), which states that where there are not enough directors to form a quorum, then the sole director may not take any decision other than to appoint extra directors (or to facilitate the shareholders doing so).

Solicitors, accountants and other advisors have traditionally taken the view that Art 7(2) provided general authorisation for a sole director to make decisions on behalf of a company, because although Art 11(2) sets a minimum quorum of two, it doesn’t actually require the company to have more than one director. In other words, the view was that effectively Art 7(2) overrides Art 11(2) and 11(3) on this point.

The Decision and the Problem

In the recent case of Hashmi v Lorimer-Wing, the High Court took the opposite view. In essence, the court has decided that Art 11(2) should be interpreted as a requirement for the company to have two directors, meaning that any company with unamended Model Articles will not be able to rely on Art 7(2).

In the Hashmi case, the sole director’s decision to commence litigation was deemed to be unlawful. The same point could equally apply though to any other decision made by a sole director, such as a decision to enter into a contract with a customer, hire or dismiss an employee, buy or sell property/assets and so forth. It could create significant risk and uncertainty for companies who have been happily carrying on with a single director for many years and could present a significant personal risk to the directors themselves if they have acted beyond the scope of their authority.

Solutions

There are two angles that companies and sole directors need to consider here – how the company’s affairs can be properly dealt with going forward, and potential risk/liability in respect of what has already happened.

In terms of the future, the obvious approach is to amend the company’s Articles to allow a sole director to operate the company. The correct corporate legal procedure for proposing and adopting revised Articles of Association would need to be followed, bearing in mind the restrictions on the current sole director from making such decisions.

Sills & Betteridge provide a fixed fee service to review and (if necessary for you) correct this issue:

We charge a fixed fee of £250 plus VAT to review your Articles and confirm whether or not this issue applies to you. This sum is waived if (i) it does apply, and (ii) you instruct us to take the necessary remedial action;

We charge £750 plus VAT for producing the necessary documents and guiding you through them, or £1,000 plus VAT if you also require us to make the necessary Companies House filings.

Looking backwards is a more difficult task. From the Company’s perspective, there are a huge range of factors to take into account when working out the potential invalidity of previous actions, the knock-on effects and potential solutions. It is not possible to give a “one size fits all” piece of guidance on how to proceed here – it will depend on the individual company situation.

From the director’s perspective, there is the potential for personal liability where they have operated the company in breach of its Articles. This is most acute where the company is or becomes insolvent or otherwise in financial difficulties. It is possible in theory for the company’s shareholders to “ratify” decisions by the director in certain circumstances, but this is quite heavily restricted – particularly where the sole director is also the sole/majority shareholder. Again, this is a topic that needs looking at on a bespoke basis for each company.

About the Author

Euan McLaughlin is a Partner in our Corporate & Commercial Team. If you would like to speak to him about any of the contents of this blog and how your Company may be affected, he can be contacted on 01522 542211 or EMcLaughlin@sillslegal.co.uk