Emma Borrington, corporate finance partner at Berry Smith, reflects on the recent case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch and its implications for limited liability companies in England and Wales with single directors and incorporating standard articles of association.
The corporate world is rarely described in terms of Narnia, but the recent case of Hashmi v Lorimer-Wing 2022 EWHC 191 Ch has left corporate lawyers and directors scratching their heads and wondering if they’ve stumbled into a brave new world. The statutes, the director and the quorum; three essential axioms of corporate law, called into question with the stroke of a judicial pen. Let’s take them each in turn.
Articles of Association are the foundation of a corporation, its binding constitution and contract, and the framework within which directors and shareholders must remain in order to make legally binding decisions for the corporation. Many companies in England and Wales are adopting ‘model’ articles of association for simplicity and clarity.
“Model” articles of association are the standard default articles of association that a company can adopt and are prescribed by Companies (Model Sections) Regulations 2008. These are designed to keep businesses running smoothly with simple and efficient rules and procedures, or so we thought.
Directors are responsible for decision-making in a company; they run the business of the company. To make a decision, the directors must hold a board meeting, and the rules governing directors’ meetings are prescribed (sometimes quite extensively) in the company’s articles of association.
A quorum is the minimum number of directors who must be present at a board meeting for it to be legal and for binding director resolutions to be passed. This is usually set at one or even two administrators. Again, this will be prescribed in the Articles of Association.
The “model” articles provide for this in Articles 11 (2) confirming:
“The quorum for meetings of the directors may be fixed from time to time by decision of the directors, but it shall never be less than two and, unless otherwise provided, it is two.”
However, sole director companies in England and Wales have traditionally relied on model article number 7(2) in order to make legally binding decisions. This confirms :
“If – (a) the company has only one director, and (b) nothing in the articles of association requires it to have more than one director, the general rule does not apply and the director may make decisions without taking into account any of the provisions of the articles relating to the decision-making of directors.
The traditional interpretation of these combined provisions, namely that single-director companies are able to hold quorum board meetings and therefore run corporations despite the adoption of the standard articles of association.
The best of worlds
The recent case of Hashmi vs. Lorimer-Wing jeopardizes this traditional interpretation. The judgment confirms that the correct interpretation of Model Article 11(2) is that the quorum for meetings of the directors of a company is two, regardless of if there is a single administrator.
Article 7(2) does not come to the rescue; the standard articles require a quorum of at least two directors under section 11(2), which constitutes a “provision of articles [that] requires it to have more than one director”which means that Article 7(2) does not apply to sole director companies with model articles of association.
This has rendered sole directors impotent and crippled sole director companies with model articles of association, rendering them unable to hold a quorum board meeting and make decisions with legal effect. The High Court has confirmed that a company which intends to operate with a single director should amend the standard articles of association to allow for a single quorum board meeting.
The brave new world requires careful navigation for single director companies with typical statutes in England and Wales.
Their best option is to use the magic of corporate law to change the quorum requirements in their existing bylaws or take the opportunity to adopt new bespoke bylaws. The other alternative is to appoint a second director to ensure quorum for board meetings, but this invariably results in the delegation of half of the board’s voting rights to another director.
Either way, doing nothing is no longer really an option for sole director companies with model articles in England and Wales; they will have to change; the statutes, the director or the quorum.
For more information or advice, you can contact Emma at 029 2034 5511 Where [email protected]