• Avinder Laroya

Case Review Of Hashmi v Lorimer-Wing [2022] And The Impact On Decisions Made By Sole Directors



In a recent High Court decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), the judgement determined that a sole director did not have the authority to commence a counterclaim where the company’s Articles included Model Articles and a Bespoke article regarding quorum for directors’ meetings. The judgement refers to the ongoing debate as to whether the Model Articles are fit for purpose for sole directors in a company and their ability to bring a claim.


This article will review the following:


  • A brief overview of the case

  • The main issues discussed during proceedings

  • The outcome of the High Court ruling

  • Concerns to review following the judgement

  • What can be done following this decision?

  • Summary


  1. A brief overview of the case


In Hashmi v Lorimer-Wing, Idrees Hashmi (the applicant) was a shareholder of Fore Fitness Investments Holdings Limited (the Company). The applicant brought a claim to court for unfair prejudice against the both the Company and Paul Lorimer-Wing (the respondents). The Company in return approved and filed their Points of Defence and Counterclaim. At the time, however, the Mr. Lorimer-Wing was the sole director of the Company.


Following the Investment Agreement, the Company’s articles of association contained a mixture of Model Articles and bespoke Articles, agreed between the parties. The applicant argued that, by virtue of Bespoke Article 16, the Company's articles required a quorum of two directors to be present at directors' meetings and therefore the respondent did not have the power to direct the Company to approve and file the counterclaim.



  1. The main issues discussed by the Deputy Judge


Richard Farnhill the Deputy Judge that presided over this case, reviewed the following issues:


  • If the respondent had the authority to initiate a counter claim on behalf of the Company as a Sole Director.

  • The conflicting interpretation between Articles 11 and 7.


The Deputy Judge held that in determining whether the respondent had authority to act as sole director of the Company, following the dispute, there needed to be proper interpretation of provisions of the Articles, namely:

  • Model Article 7(2) (Directors to take decisions collectively) provides that where a company has only one director, the general rule does not apply, and the director may make decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

  • Model Article 11(2) (Quorum for directors’ meetings) allows the directors to fix the quorum for directors’ meetings from time to time, but it must never be less than two directors and, if not decided otherwise, it shall be two.

  • Bespoke Article 16, which sets the quorum for board meetings at two directors.



  1. The outcome of the high court ruling


The Deputy Judge held that the Article 11 (2) and Bespoke Article 16.1, required the Company to have a minimum of two directors. In addition, he noted that Article 7(2) could not be relied on as it conflicted with Article 11(2). Furthermore, Bespoke Article 16.1 reenforced that the Company had to have more than one director. As a result, Mr. Lorimer-Wing did not have authority to approve the counterclaim on behalf of the Company and his claim was considered ultra vires.


  1. Concerns to review following the judgement


This High Court decision has raised the following concerns:


  • Whether a sole director can take the decision to initiate a counterclaim?

  • The issues of ambiguous drafting of the model articles with sole directors.

  • Whether past decisions made by sole director companies that have previously relied on the unamended Model Articles are valid.



Following this decision, the validity of decisions taken by sole directors could be open to challenge, where Model Articles apply without amendment. This means that if there is any dispute, regarding a decision made by a sole director in a company, the decision, in this case, will be used and this could have serious ramifications for both the sole director and the company.


This means that companies with sole directors that have previously relied on the unamended Model Articles, will need to ratify any decisions made by the sole trader in the past, where appropriate.


  1. What can be done following this decision?


The decision in this case is not how Model Articles have generally been interpreted. However, following this decision, it is likely that a number of companies with sole directors have adopted the Model Articles in an unamended form. As mentioned earlier, to address any potential risks, companies should seek to review and amend their Model Articles to ensure all potential risks are reviewed and ensure that there is no requirement for a minimum of two directors to ratify past decisions.


In addition, one or more additional directors can also be appointed to prevent any further breaches of Article 11(2).


Summary


In summary the case decision has highlighted the potential risks to consider and review when using the model articles of association.


The model articles of association are a set of default articles that cover the key concerns of a business. The key question following the court decision is what steps can a company with a sole director do, given the uncertainty, the safest course is to amend Article 11(2) to provide clearly that the quorum for a directors’ meeting is at any time when there is only one director and to explicitly state the minimum number of director is one with no maximum number.


Alternatively, an additional director may be appointed, careful consideration should be made as to how this may impact the decision making process.


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