Running a business as a sole director may seem straightforward, but it carries significant risks that can create operational and legal challenges. Recent developments, including legal cases, highlight why relying solely on one director could jeopardise the continuity and decision-making capability of your company.
Here’s what you need to know:
If Something Happens to the Sole Director, Then What?
A sole director is often the cornerstone of a company, but this dependency can be risky. If the director becomes incapacitated, passes away, or is otherwise unable to perform their duties, the business could grind to a halt. Without another authorised individual to step in and make decisions, the company may struggle to pay bills, access bank accounts, or fulfil critical obligations. This lack of continuity can be devastating for employees, clients, and suppliers who depend on the company’s operations.
Recent Legal Developments: The Impact of Model Articles
The recent case of Hashmi v Lorimer-Wing (2022) has brought attention to a critical limitation in companies that operate under the standard “model articles” provided by the Companies Act 2006. These articles, often adopted by default when companies are incorporated, have been found to restrict sole directors from making certain key decisions.
One of the most significant implications of this ruling is that a sole director company may be unable to pass resolutions to place the company into liquidation or make other essential decisions. This creates a legal grey area that can stall actions during critical moments, potentially leaving the company and its stakeholders in a precarious position.
Mitigating the Risks: Practical Steps
To safeguard your business, consider the following steps:
- Appoint an Additional Director: Having at least one additional director ensures that the company can continue operating smoothly if something happens to the primary director. It also provides a second authorised individual to share the responsibility of decision-making.
- Review Your Articles of Association: Work with a legal professional to review and, if necessary, amend your company’s articles to ensure they allow a sole director to take critical actions. Tailored articles can prevent unintended restrictions.
- Establish Contingency Plans: Implement robust contingency plans to address scenarios where the sole director is unavailable. This might include granting a trusted individual a lasting power of attorney for business matters.
While having a sole director might seem like the simplest option, it can create vulnerabilities for your business. By proactively addressing these issues through appointing additional directors, amending articles, and planning for contingencies, you can protect your company’s stability and ensure smoother operations in uncertain times.
If you’d like to discuss how these changes could benefit your business, please feel free to get in touch.
