The recent case of Hasmi v Lorimer-Wing in the High Court has highlighted the conflict between two fundamental principles in a company’s constitution and the Model Articles.
First, the general rule that director decisions are made by a majority decision, except if there is a sole director when the general rule is disregarded. See article 7 of the Model Articles.
Second, the requirement that unless a quorum has been set for director meetings, the minimum quorum is fixed at two directors. See article 11 of the Model Articles.
Facts of the case
The case in question related to a company incorporated in February 2019. The petitioner, Mr Hashmi, worked in the company as a software developer and in March 2020, following an investment round, he became a shareholder and director with two other individuals. A breakdown in the relationship quickly ensued and in March 2021, Mr Hashmi was removed as a director and designated as a “Bad Leaver” meaning his share equity in the company was essentially forfeited. Following Mr Hashmi’s removal, there were two remaining directors, but in June 2021 following a resignation, Mr Lorimer-Wing effectively become the company’s sole director. Mr Hashmi brought proceedings against Mr Lorimer-Wing and the company, which included a claim for unfair prejudice. In response, Mr Lorimer-Wing defended and counter-claimed on behalf of the company and himself.
In this case, the company Fore Fitness Investments Holdings Limited was incorporated with the Model Articles, but at the time of the investment new articles of association together with an investment agreement were adopted. The bespoke articles of association included a term to modify article 11 of the Model Articles, suggesting that the company would always require two directors.
The question was whether Mr Lorimer-Wing could act lawfully for the company as a sole director. In this case, the judge has said the sole director did not form a quorum, therefore invalidating the director's decisions.
Commentary
The Model Articles are often the default articles of association adopted by a company, setting out the rules for the management and ownership of a company. The articles of association are a form of statutory contract which binds all shareholders, whether or not read or agreed.
Companies with sole directors are very common and in my experience many lawyers will assume a company with a sole director has the authority to make decisions, without requiring a second director to be appointed. The judge in this case has robustly rejected relying on this assumption. Some commercial lawyers may disagree, but nevertheless it is important to note, as the principle here can have a much wider application.
For example, in the field of acquisition work, if at the point of completion there is a sole director, is it sufficient that the sole director can pass the necessary resolutions to approve the share sale, or must the company's shareholders first pass a resolution to put beyond question, that a company with a sole director at any time, would not need at least two directors for a quorum? The options would be for the shareholders to either: (a) appoint a second director so there is a valid quorum of two directors; or (b) amend the articles of association to amend Model Article 11.
In lending, we can expect banking documentation, even for small lending, to require a shareholders resolution to remove any constituational issue.
But there is a bigger issue here. Do you have to go back through the history of the company and consider periods where the company has had a sole director, and whether any historic actions are ultra vires?
In my view, if you have a company which has been incorporated with the Model Articles and operated as a company with a sole director throughout its existence, and has only ever had one individual shareholder who is also the same person as the sole director, then clearly there is no risk.
If, however, you have a company with a sole director who is different from the shareholder, then you may need to be taking a view. If the company has operated for some time, with a sole director, you may be more inclined to take a view Model Article 11 is not relevant.
If you have a company which has had more than one director at any time with different shareholders, then you are on notice to consider further. The question is whether the sole director can lawfully operate the business without decisions being ultra vires i.e. unlawful (and have past decision been unlawful)?
Maybe buyer's of companies will want to have an indemnity from sellers.
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If you have any questions relating to this blog then please contact Spencer Laymond, our company law specialist either by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or by telephone on (020) 8363 4444.
