Do the model articles require a company to have more than one director?

In the following article, our corporate team provide an update on High Court decision Hashmi v Lorimer-Wing (Hashmi) (also known as Re Fore Fitness Investments Holdings Ltd). The team discuss whether private companies which adopt the model articles (MA) need to amend certain provisions where there is a sole director, in the context of (among others) MA seven and 11.

Background

Those who have or are looking to set up sole director companies governed by the model articles of association for limited companies may be affected by the decision.

The High Court in Hashmi held that MA 11(2) as unaltered implies a requirement for a company to have a minimum of two directors. MA 11(2) stipulates that the directors may decide upon the quorum requirements for a meeting, but it may never be less than two directors. In the absence of a decision on this, the default quorum is two directors.

The Court was clear in Hashmi that MA 7(2) permitted a company to have a sole director – where no other articles required there to be more than one director.

Implications

The validity of acts taken by sole directors of companies with unamended Model Articles can now be challenged following the decision in Hashmi.

Prior to Hashmi, the industry consensus was that the unamended Model Articles were compatible with sole director companies. Consequently, the decision in Hashmi has proven controversial.

Re Activewear Limited (In Administration) expressly criticises Hashmi. The judge held that MA 11, which is contained under the section heading ‘decision-making by directors’ is expressly disapplied by MA 7(2), citing Arnold v Britton (rules on contractual interpretation). MA 7(2) expressly states that a sole director can make decisions without regard to any of the provisions of the MA relating to directors decision making (eg MA 11(2)) where no provision of the articles requires the company to have more than one director. Rather than a requirement to have no less than 2 directors, MA 11(2) is rather a way in which decisions can be made in companies which have multiple directors.

The decision in Hashmi is surprising, however, the decision not to follow Hashmi in Re Activewear Limited (In Administration) suggests that Hashmi may be overturned at some point. However, Re Activewear Limited (In Administration) does not overturn Hashmi itself.

Recommendations

Companies which have or propose to adopt the Model Articles, should they wish to operate with a sole director, should get in touch to discuss adopting a set of amended articles to avoid the negative implications of the decision in Hashmi.

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