Insights

Tanya Seevaratnam

Published 7 September 2022
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Warning to Insolvency Practitioners – Check the validity of your appointments

The use of Model Articles – the background

In 2006, the Companies Act introduced Model Articles, a generic example of Articles of Association that have been adopted (either in their entirety or as amended) by many companies. If a company does not refer to any Articles of Association, the Model Articles are adopted in default.  

The recent case of Hashmi v Lorimer-Wing

However, a decision of the High Court earlier this year has now cast doubt on whether using Model Articles in a situation where there is a sole director is appropriate. In the case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), Mr Hashim and Mr Lorimer-Wing were both directors of Fore Fitness Investments Holdings Limited (the “Company”), which had adopted the Model Articles subject to slight amendments. Following a disagreement, Mr Hashim was removed as a director of the Company and Mr Hashim then filed an unfair prejudice petition. The Company acting by Mr Lorimer-Wing as its sole director served a defence and counterclaim. Mr Hashim applied to strike out the counterclaim on the basis that Mr Lorimer-Wing as a sole director had no power to direct the Company to file a counterclaim in accordance with its Model Articles (as amended).

The issues  

The issues, in this case, focused on Model Articles 7 (decision making by directors collectively) and 11 (quorum for directors’ meetings) referred to below:

Article 7

“7(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

7(2) If – (a) the company only has one director, and (b) 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.”

Article 11

“11(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(2) 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.

(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision – (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.”

The Findings

It had previously been widely presumed that Model Article 7 took precedence over Model Article 11, allowing a sole director to act without having a quorum of at least two directors for directors’ meetings. However, the Judge in this case found in essence that the quorum provisions in Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors to make decisions. He held that Article 7(2) permitted a sole director to manage the company only if there are no other provisions within the articles that require the company to have more than one director.  In this particular case, the Judge struck out the counterclaim because the articles required at least two directors to participate in any decisions to commence a counterclaim. As Mr Lorimer-Wing was acting as a sole director he had no power to direct the Company to bring the counterclaim.

Implications for Office Holders

As a consequence of this judgment, there is a risk that a decision made by a sole director (of a company that has incorporated the Model Articles in whole or in part), which then comes into dispute could be deemed to be void or invalid.  The danger is that if a sole director in such circumstances resolves to place a company in administration or liquidation, then the subsequent appointment of any administrator or liquidator could be challenged as invalid by any disgruntled creditor or other interested party.

Therefore, Insolvency Practitioners approached to deal with the administration or liquidation of any company that has a sole director should first check whether the company in question has adopted the Model Articles and if so, which provisions.

Possible Options

Time will tell whether the decision in Hashim v Lorimer-Wing is subsequently overturned but, in the meantime, it is important that companies with a sole director that have adopted the Model Articles consider what steps are necessary to protect their position. One option could be to appoint a second director or to resolve to amend the Model Articles to clarify that these do not require the company to have more than one director.

Each company situation is of course unique, and we recommend appropriate legal advice is sought before any appointment is effected. Please get in touch if you’d like to discuss any issues arising from this article.

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