Running Your Business
Many pharmacy businesses in England and Wales are operated as private limited companies, often with a single director, writes solicitor Fatima Mehdi.
In the recent case of Hashmi v Lorimer-Wing, the High Court found that, in certain situations, companies with only one director in office (a not uncommon circumstance, particularly in family-owned pharmacies) may not be operating lawfully.
Here’s the reason for the concern, and what can be done to protect companies, directors and shareholders.
On formation, companies formed in England and Wales (governed by the Companies Act 2006) are required to adopt Articles of Association. This document is the company’s principal constitution document and the backbone of its internal governance. The Articles regulate, in legal terms, how a company is to be operated and the procedures that need to be followed for its day-to-day decisions and actions to be lawful.
When forming a company, its founders have the option of adopting so called ‘model form’ Articles (prescribed by company law). Alternatively, they can adopt an amended version of the model Articles, or indeed a completely bespoke set.
Many pharmacies operating as private limited companies will have been formed by the company’s accountants or ‘formation agents’. Companies will have adopted the model Articles, or with certain variations and bespoking.
The Hashmi Case
The case of Hashmi v Lorimer-Wing highlights the conflict commonly found within Articles that are based on the model form.
Under one provision of the Articles, a sole director of a company is usually authorised to take decisions on their own, but under another article, meetings of the directors are often required to have no less than two directors present.
The decision in the case has surprised many lawyers and legal commentators since, for many years, the commonly understood position has been that despite the Articles requiring at least two directors to be present at a board meeting for the same to be valid, where the company only has one director, the Articles will be construed to say that the sole director can still nevertheless make decisions alone.
“If you are the sole director of such a company, there is a risk that your actions and decision making as the sole director may potentially not be valid”
Whilst a subsequent case under English law has softened the impact of the Hashmi judgement, there remains risk for companies with a single director, particularly where a company has been formed with more than one director but the board has since evolved to leave only one director in office. There may also be concerns around sole director companies that were not formed adopting model Articles in full.
The legal position may yet be further clarified in a subsequent case, but until then, the current legal position is that if you are the sole director of such a company, there is a risk that your actions and decision making as the sole director may potentially not be valid, such that those could be open to challenge or be overturned.
This is of particular concern in the context of decisions to make substantial legal commitments, such as signing a new lease, a business sale or purchase, or taking on secured financing.
A relatively simple way to guard against this risk is for the company to appoint an additional director to the board (although this may present other complications around control of decision making going forwards).
There will be a process to follow in order to make the appointment (such as obtaining consent from the incoming director, passing the appropriate company resolutions and notifying Companies House). Regardless of the confusion caused by the Hashmi case, the law does allow for a sole director to either appoint an additional director or to call a general meeting of the members to make further appointments.
In any event, companies are best advised to commission a review of their Articles to verify whether they are at risk based on the Hashmi judgement. The review ought not to be a complex or lengthy exercise for an experienced lawyer.
Appointing an additional director and checking the company’s Articles are two relatively inexpensive and straightforward solutions that allow the company to operate correctly going forward. However, there may still be some concerns around the validity of historic decisions made by sole directors, in which case the company could also consider passing a ratifying shareholder resolution to put historic decisions on an approved footing. This will help to minimise the risk of past decisions made by a sole director being challenged or overturned.
The above is a general overview. We recommend that independent legal advice is sought for your specific concerns.
Fatima Mehdi is a solicitor in the corporate team, Charles Russell Speechlys LLP firstname.lastname@example.org