Sole directors: clarity for companies with unamended model articles

The High Court has held that where companies have adopted the model articles without amendment, any sole director acting has the power to pass resolutions acting alone. The decision is contrary to the view expressed in the recent case of Re Fore Fitness Investments Holdings Limited [2022] EWHC 191 (Ch) (which we have discussed previously) and provides some clarity for companies with sole directors.

Re Fore Fitness Investments Holdings Limited [2022] EWHC 191 (Ch)

In summary, this case concerned the tension between model articles 7(2) and 11(2) in relation to the ability of sole directors to make decisions on behalf of the company.

Article 7(1) provides that decision-making by directors must be made by a majority or unanimous decision, subject to the proviso set out in article 7(2), which states that: “if the company only has one director, and no provision of the articles requires it to have more than one director… the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”

Article 11(2) (in relation to directors’ meetings) states: “[the quorum for directors’ meetings] may be fixed from time to time… but it must never be less than two, and unless otherwise fixed it is two.”

Contrary to the commonly held view, the High Court concluded that article 11(2) (along with bespoke article 16 contained in the company’s articles of association) was a provision which required the company to have more than one director, and therefore the sole director was not able to validly make decisions acting alone in reliance on article 7(2). Specifically, the deputy judge suggested that model article 11(2) should be deleted to enable sole directors to make decisions acting alone.

Re Active Wear Limited [2022] EWHC 2340 (Ch)

Facts

This case concerned the validity of appointment of company administrators, which was made by a sole company director using the out-of-court route (under paragraph 22, Schedule B1 of the Insolvency Act 1986). The company had adopted the model articles, without amendment, and had always had a sole director. The administrators applied to court for a declaration as to the validity of their appointment, in light of the decision in Re Fore Fitness Investments.

Decision

In this case, the deputy judge concluded that “the unambiguous effect of article 7” of the unamended model articles was to permit a sole director of a private company to make any decision in relation to the conduct of the affairs of the company on their own. The court found that article 11(2) was specifically disapplied by article 7(2) in circumstances where there is only one director and there is no other provision requiring more than one director – which, in the case of the unamended model articles, there is not.

The deputy judge distinguished Re Fore Fitness Investments as that company had adopted a mix of bespoke articles alongside the model articles. In that case, the factor dictating the result was thought to be the existence of bespoke article 16, which set a quorum of two. The deputy judge considered that model article 11(2) could not have the same effect, which would otherwise deprive model article 7(2) of any practical meaning.

Comment

While this judgment does provide some clarity for companies with unamended model articles, the deputy judge did note that there is an “apparent tension” between article 7(2) and 11(3) where the number of directors drops to one from a higher number, and that article 7(2) potentially could only apply where the number of directors has never been greater than one. Consequently, this decision will be of little comfort to a sole company director where they previously acted alongside co-directors. 

Further, the decision will not assist companies with a mix of model and bespoke articles, in which case the articles will likely require amendment to specifically permit sole directors to act and reduce the quorum requirement to one. If amending the company’s articles (which would require shareholder consent) is not a practical or desirable option, a second director should be appointed to avoid any doubt as to the validity of decisions taken.