A recent legal case of Hashmi v Lorimer-Wing provides inconsistencies in the Model Articles (“Articles”) regarding the validity of the decision-making process of the sole director of a private limited company. It puts decisions made by the sole director of the private limited companies at risk of being unlawful which can be challenged at the Court.
If you don't want to know the specifics of the case, you can skip ahead to the implications for a sole director of a private limited company and the solution.
Background of the Case
Indrees Hashmi (the Applicant) filed the case against Paul Lorimer-Wing and Fore Fitness Investments Holdings Limited (the Respondent) in the matter of Fore Fitness Investments Holdings Limited and the matter of Companies Act 2006.
Mr. Hashmi filed his unfair prejudice petition on 10 August 2021. On 21 September 2021, the Respondents served their Points of Defence and Counterclaim including claims for breach of director’s duties, breach of contract, and pre-contractual misrepresentation.
Facts of the Case
Lorimer-Wing incorporated Fore Fitness Investments Holdings Limited (the “Company”) on 27 February 2019 as a sole director and shareholder of the Company.
He hired Hashmi as a Software Developer in the Company in 2019. By March 2020 he then became a shareholder of the Company. Soon after, on 20 March 2020, Hashmi subscribed to 4639 Ordinary A Shares and 1500 Ordinary B Shares. Subsequently, Hashmi was appointed as a director of the Company along with Mr. James Gilbert.
However, disagreement took place between the directors, and on 2 March 2021, Mr. Lorimer-Wing removed Mr. Hashmi from the Director position on the ground that he was a bad leaver according to the Articles of Association (“AOA”) of the Company. It was deemed to have served a transfer notice concerning the Ordinary A Shares and automatically offered all his Ordinary B Shares.
The termination of Mr. Hashmi’s Directorship was filed at the Companies House on 19 April 2021. Mr. Gilbert ceased to be a director of the company on 13 June 2021. Since then, Mr. Lorimer-Wing acted as the sole director of the Company.
Relief Sought by Mr. Hashmi
Hashmi contested the validity of the steps taken by Mr. Lorimer-Wing regarding the termination, & shares and sought the following relief:
- The counterclaim by the Company should be struck out.
- Mr. Lorimer-Wing's counter-petition be refused permission.
- An injunction requiring Mr. Lorimer-Wing to reimburse the Company for any cost paid regarding the petition and application.
- An injunction restraining Mr. Lorimer-Wing from causing or procuring the company to participate in the petition and incur any cost about it.
- Direction regarding the services of a reply by Mr. Hashmi.
The Decision of the Case
The Court granted Mr. Hashmi’s claim to strike out the company’s counterclaim mentioning that Mr. Lorimer-Wing as a sole director of the company did not have authority under the company’s AOA to make the counterclaim. Both injunctions were refused to be granted on the ground that it was broad, and the evidence was inadequate.
High Court Ruling Creates Implications for Sole Directors
- The judgment has questioned the adoption of the Model Articles by the private limited company having a sole director as Article 7(2) and Article 11(2) are inconsistent with each other. Moving forward, the integrity of the model articles will be questioned.
Article 7(2) states no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making whereas, Article 11 (2) states that The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
- This judgment creates the risk of invalidity of all the decisions taken by the sole director of the Company and restricts the future decisions to be made by the sole directors.
How to Move Forward?
We understand that there are many companies with a sole director. We further understand that the companies have adopted model articles as they were not contested before. What can we do about it? We offer the following options for now, for the existing companies with sole directors to mitigate the risk of the established precedent on the Hashmi v Lorimer-Wing:
1. Appointment of Another Director
The decision clearly says that the quorum for a directors meeting must never be less than two if so has been mentioned in the Model Articles. Moving forward to meet the quorum requirement for safeguarding the decision made by the sole director in the private limited companies one of the simple ways is to appoint a new director. The only decision that the Articles validate without the quorum is the appointment of another director. This is one way to comply with the judgment of the case in presence of the Model Articles.
2. Amendment Articles of Association
If the company is to have a sole director and does not want its decision to be challenged in the future, it can amend the AOA through a special resolution. We can amend or remove Article 11(2) to make the decisions made by the sole director valid.
In the case of the new companies with a sole director, it will be wise to not adopt the model articles instead it can submit amended Model Articles or Bespoke Articles. This flexibility has been provided by the Companies Act 2006 and The Companies (Model Articles) Regulations 2008.
We have a solution moving forward but what shall we do to validate the previous decisions taken by the sole directors? To validate the past decisions, we can pass the shareholders' resolution addressing the approval of the past decisions by the shareholders of the Company.
If you are the sole director of the private limited company and need assistance in this regard, then please do not hesitate to contact us.
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