Is a Sole Director Enough for Your Company?

When companies are formed, they are required to prepare a set of rules that legally bind the owners and specify how they can run the company. These rules often contain information about the minimum and maximum numbers of directors and how everyday responsibilities are split between them. These rules are known as the “articles of association”.

For ease, private companies often use the “model articles” provided by Companies House, as they see little reason to change them. A recent court case of Hashmi vs Lorimer-Wing has brought to light problems with these “model articles” that may arise for companies that have only appointed a sole director to oversee all decisions.

The “sole director” who is the decision maker based on the model articles of association has now been called into question in this recent court judgement and it has implications for many companies that were set up in this way.

What's the Problem with a Sole Director?

As noted in the recent court case Model Article 11 (2) in the model articles of association states that the minimum number of directors present at a meeting that is required for a quorum to be declared is two. A quorum is required before directors can make certain decisions on behalf of the company.

Model Article 7 goes on to state that any decision made by the directors must be at a meeting or a decision where there was a sole director, this formality could be omitted where no provision of the articles requires it to have more than one director.

Prior to this case, it was assumed that Model Article 11 (2) and Model Article 7 taken together meant that a sole director was perfectly entitled to act on behalf of the company but the recent decision of the court disagreed with this assumption.

What does this mean for Companies with Model Articles?

A sole director is considered not to be able to make valid decisions alone and, if they do so, they may be deemed to be acting without authority, invalidating that decision.

Two possible solutions for companies with Model Articles and a sole director:

• The company appoints a second director to ensure that any meetings of the company meet the requirements of Model Article 11, ensuring all future meetings are quorate, or
• amend the existing articles (with the quorum adjusted to one) and this ratifies any previous decisions and actions undertaken by the sole director.

Assistance from Lawrence Grant

At Lawrence Grant, we are able to assist you with amending your articles of association so that the role of the Sole Director is properly acknowledged throughout, ensuring that the legal issue which has been found does not apply to your company. Alternatively, if you prefer, you may want to appoint a second director and we can assist you with this also.

Please feel free to get in touch with us today if you are worried about the implications for your business. We are keen to help you and will happily fix the problems with your Model Articles of Association.

Proudly authored by Alan Rajah, Partner and Ajay Shah, Partner.