The authority of a sole director of a private limited company in the UK following Hashmi v Lorimer-Wing

Iain Rogers

De Pinna, London

iainr@depinna.co.uk

Alisa Grafton

De Pinna, London

alisag@depinna.co.uk

Introduction

Model articles of association have been made available to the members of registered private companies limited by shares in the United Kingdom ever since incorporation by registration became possible in the mid-19th century.

Prior to 1 October 2009, the model articles for private companies limited by shares were generally known as 'Table A'. While a private company was permitted to have a sole director, the various versions of Table A that were published from 1948 to 2007 expressly imposed a minimum of two directors.

While in certain specialised situations it can be desirable to impose a minimum and/or maximum number of directors, for most people who incorporate a company, the convenience of having a sole director can be attractive, and the flexibility of being able to have one or more directors at any time is desirable.

In the past, incorporating a company by registration was a task generally carried out by law firms and incorporation agents. Each firm or agent would have a pre-prepared set of amendments to Table A that adapted the model articles so that a company could be managed with greater convenience, including the option of having a sole director. In this manner, anyone wishing to incorporate a company and be its sole director would have no difficulty in doing so.

The use of law firms and incorporation agents is now a thing of the past for many people who wish to incorporate a private company limited by shares in the UK. The process can be handled online using the Companies House website, and the form used to incorporate a company allows model articles to be selected by ticking a box. The current model articles for private companies limited by shares are scheduled to the Companies (Model Articles) Regulations 2008 and are no longer called 'Table A'. They were amended in April 2013 by the Mental Health (Discrimination) Act 2013 by the removal of one paragraph,[2] but otherwise have remained unchanged in over 12 years.

There are many, many companies in existence in the UK that have adopted the model articles and have a sole director. Until recently, despite some doubt and misgivings when they were first introduced, it was generally believed that the model articles permitted a company to have a sole director. Now the High Court has ruled that this is not the case.

The case of Hashmi v Lorimer-Wing

In brief, the facts of the case are that Mr Hashmi had worked with Mr Lorimer-Wing on a project to provide gym facilities through a company called Fore Fitness Investments Holdings Limited. Mr Hashmi, along with others, invested money in the project and was, for a period, one of three directors of the company. Mr Lorimer-Wing was the sole director when the company was incorporated, and became the sole director again after Mr Hashmi, and one other director, left office. The company was incorporated in 2019 and the model articles were adopted. New articles were adopted to reflect the various ownership interests in the company following a fundraising initiative, but the model articles were used as the basis for these bespoke model articles.

Following a dispute, Mr Hashmi brought proceedings against Mr Lorimer-Wing and the company on the basis that the company's affairs had been conducted in a manner that was unfairly prejudicial to him, and he applied for an order that Mr Lorimer-Wing should purchase his shares in the company. The company counterclaimed for, inter alia, damages for breach of Mr Hashmi's duties as a director of the company.

The key point here is that, at the time when the company filed its counterclaim, Mr Lorimer-Wing was the sole director. Mr Hashmi applied for the counterclaim to be struck out on the basis that the company's articles did not permit it to have a sole director; therefore, the actions of the sole director were ultra vires.

To the surprise of many company lawyers, the High Court ruled in Mr Hashmi's favour on this point, having considered the specific terms of the bespoke articles of association adopted by the company. Even more surprisingly, it was stated that the current model articles for private companies limited by shares (on which those bespoke articles were based) did not permit a company to have a sole director. This was due to Model Article 11 imposing a minimum quorum of two directors, which was interpreted by the High Court as being a minimum number of directors, despite Model Article 7 seemingly permitting a sole director to act 'without regard to any of the provisions of the articles relating to directors' decision-making'.

Consequences of the decision in Hashmi v Lorimer-Wing in the context of notarial services

While this case has received fairly broad coverage in the legal press, many sole directors of companies registered in the UK are understandably unaware of the problem.

If the sole director of a company is also its sole shareholder, as is often the case,[3] the decision in Hashmi v Lorimer-Wing may seem illusory as there is, in effect, no one with standing to take action against the company for lack of authority of the sole director. There are also sole-director companies that have adopted the model articles and have a multitude of shareholders (or a sole shareholder who is not the sole director), in which case, the lack of authority of the sole director is of much more immediate concern. However, this decision is likely to affect all such companies in practice as banks and other parties with which sole-director companies wish to deal will insist on a second director being appointed or on the articles being amended expressly to permit a sole director to act.

Practical problems for notaries in England and Wales dealing with sole-director companies

This issue has come up frequently in notarial practice in England and Wales since the High Court's decision was published. Notaries check the articles of association of companies that are accessing their services, and there is a duty of care to the client and to all parties placing legitimate reliance on the notary's services[4] that precludes a notary from acting if the articles are not complied with. If a notary encounters a private company that has a sole director and the model articles have been adopted (or bespoke articles based on the model articles, as was the case in Hashmi v Lorimer-Wing), a solution has to be found.

Appointing a second director is often not palatable to the person who has incorporated the company, so an amendment to the articles of association of the company is the most likely solution to the problem presented by this decision.

Hope for the future?

It is possible that the decision will be overturned by the Court of Appeal or the Supreme Court if a similar case gets to that stage (there is no indication that Hashmi v Lorimer-Wing is being appealed); potentially, a similar case based solely on the model articles will distinguish it on its facts (arguably the judge's comments on the model articles were obiter dicta as the company had adopted bespoke articles); or potentially new model articles will be published that expressly provide for a sole director to act (which may resolve the situation for the future, but there will still be the legacy issue of existing companies that have adopted the model articles under the 2008 Regulations). For now, however, a private company limited by shares must have two or more directors if the model articles have been adopted without amendment.

Notes