New Legal Ruling Impacts Limited Company Sole Directors
A recent legal case regarding Model Articles and bespoke articles for Private Companies Limited by Shares has brought into question sole directors, which could impact your ability to secure property finance. We look at the details and what this means for limited company directors going forward.
In the case (Fore Fitness Investments Holdings Ltd, Hashmi v Lorimer-Wing [2022] EWHC 191), a shareholder challenged the director’s legal ability to make decisions about the company without the involvement of a board. The challenge occurred due to discrepancies between Model Articles and a bespoke article. To summarise the original context, the shareholder brought a claim for unfair prejudice against the company, which the director counterclaimed. The shareholder then challenged whether the director could file the counterclaim as no board meeting had been held, as required by the company’s Model Articles and bespoke articles.
What are Model Articles
Model Articles are standard articles limited companies use to set out how a company is run, as set out by the Companies Act 2006. These apply by default when you set up a limited company. As all companies are unique, it is possible to add, edit or remove provisions to your articles, essentially creating bespoke articles. Typically, this requires at least 75% of shareholders for the company to agree, and you must inform Companies House.
Model Articles specify that company decisions must be made at a board meeting, unless there is a sole director (in which case they can make decisions themselves). In this case, the company had a bespoke article which modified the Model Articles, requiring a board meeting to be “two Directors, one of whom must be an Investors’ Director (if appointed) and one the Executive”.
In the recent case, the judge ruled with the shareholder, agreeing that the bespoke article required two directors at a director’s meeting and that the Model Article (7(2)), which makes allowances for sole directors, was disapplied.
Why does this matter to limited company landlords?
Following the ruling, some solicitors now insist that limited companies have two directors, but that where there is only one director, the Model Articles are changed to reflect this. This doesn’t mean you can’t be a sole director (because that wouldn’t be practical). However, should the articles for your limited company not be applied in accordance with your company structure, solicitors may not be able to provide your mortgage lenders with a statement that all legal documentation is correctly completed.
The consequence of this? Delays. Legal searches are generally completed towards the end of the mortgage process, which means you may be approaching your mortgage offer expiry date. In the current economic climate, many lenders are not extending mortgage offers as they used to, meaning you’d lose your chosen product. Not only would you need to start the process again, but you’d likely pay considerably more for the mortgage due to rapidly rising interest rates.
How can you avoid issues?
Ensure your limited company articles match your true company structure. You may need to speak with your solicitor and make amends with Companies House, which can take a couple of weeks, but better to do it now than when a mortgage offer expiry is fast approaching. It’s likely solicitors will check more thoroughly for these discrepancies following the judgement, so it’s better to be prepared!
If you’re looking to fix in on a competitive buy to let limited company mortgage, either for a purchase or remortgage, call our expert team on 0345 345 6788 or submit an enquiry today.
Source: Gateley.
13th July 2022
