Can a company which has model articles act by a sole director?
In Hashmi v Lorimer-Wing (Re Fore Fitness), the High Court considered this question specifically where the company’s quorum for decision making by directors is two, under its relevant articles of association, but the company only has a sole director.
In that case the High Court found that a bespoke article analogous to Model Article 7(2) (Directors to take decisions collectively) imposed a requirement for a company to have a minimum of two directors to make decisions on behalf of the company.
The finding in this case caused uncertainty as well as a legal and compliance issue for sole director companies, particularly those incorporated with model articles, as it raised a question over a sole director’s authority to act on behalf of a company.
Further clarity in Re Active Wear
Subsequently the case of Re Active Wear has provided some clarity on the issue.
The judgment in Re Active Wear particularly focuses on model articles 7(2), 11(2) and 11(3):
- 7(2) if (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
- 11(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
- 11(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision:-
- (a) to appoint further directors, or
- (b) to call a general meeting so as to enable the shareholders to appoint further directors.
The High Court had to determine the validity of the appointment of joint administrators of the respondent company by the sole director. The company had only ever had one director and the company’s articles of association were the model articles prescribed for private companies limited by shares. The administrators applied to the court for a declaration as to the validity of their appointment, in light of the decision in Re Fore Fitness.
The issue at hand was whether the director was entitled under its articles to make the decision to appoint.
The court ruled that the appointment was valid notwithstanding the earlier decision in Re Fore Fitness. The court applied the principles of construction of articles of association as in Cosmetic Warriors Ltd v Gerrie and Arnold v Britton (focusing on the meaning of the relevant words in their documentary, factual and commercial context) and held that the effect of Article 7 was unambiguous. A sole director could take decisions “without regard to any of the provisions of the articles relating to directors’ decision making”, including Article 11, as both articles are contained within the same section of the model articles, titled “Decision-making by directors”.
The court held that Article 11(2) of the model articles (relating to the quorum for directors’ meetings) is 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, and held that the model articles have no other provisions that require more than one director. The court indicated that the articles must be read as a whole, and it could not have been intended when the model articles were drafted that they would need to be amended in each case by a company before article 7(2) could operate.
However, the court separately indicated that where a company with unamended model articles previously had more than one director, but now only has one director, model article 11(3) would apply in place of article 7(2), with the sole director’s authority being restricted to appointing a second director.
This case was distinguished from the decision in Re Fore Fitness on the basis that, in Re Fore Fitness, the model articles had been amended to include a bespoke Article 16, (analogous to model article 11(2)), which stated that the quorum for a meeting of the board was two directors. It was held in Re Active Wear that the decision in Re Fore Fitness was specific to its facts, and that Article 7(2) was only disapplied as a result of the bespoke Article 16.
The judgment in Re Active Wear provides some clarity for sole directors of companies with unamended model articles who have always only had one director, as it is now clear that they do not need to amend their articles or appoint a second director to manage the company’s business.
However, the judgment does create room for confusion given that different approaches will need to be taken by different sole director companies depending on its director history and the form of its articles (model articles or equivalent bespoke articles). If in any doubt, sole director companies should seek specific legal advice on their company’s position.
For companies with sole directors that previously had multiple directors, or that have bespoke or amended model articles relating to a quorum for director decision making of two or more, to avoid any doubt as to the validity of decisions, either:
- amendments to the company’s articles will be required to specifically amend the quorum requirement and allow sole directors to act. The amendments will need to be proposed by the shareholder(s) under section 292 of the Companies Act 2006 as the director will not have authority to do so; or
- a second director will need to be appointed.
If you have any queries regarding a company’s articles of association, a sole director’s authority to act, or other corporate constitutional matters, please get in touch with our Banking or Corporate team who will be able to assist.
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