In In Re Active Wear Ltd [2022], the High Court in London has sought to clarify model articles for companies with a single director, following a case earlier this year which had surprised corporate lawyers as to the interpretation of model articles relating to directors’ decision making and the minimum number of directors.
The model articles of association, which are set out in the Companies Act 2006, are the standard default articles available for use by companies incorporated in the UK. To understand the 2022 cases on sole directors, the principal provisions of the model articles which were considered in the two cases are summarised below:
- model article 7(1) sets out what is known as the “general rule”, being that any decision of the directors must be either a majority decision at a meeting or a unanimous decision;
- model article 7(2) states that if a company only has one director, and no provision of its articles requires it to have more than one director, the above “general rule” does not apply, and the single director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making; and
- model article 11(2) says that the quorum for directors’ meetings is two, unless otherwise fixed by the directors.
Hashmi v Lorimer Wing [2022] – known as The Fore Fitness Decision
In the earlier decision in Fore Fitness (see link to our article on that case here), the Court had decided that the model articles for private companies, which are automatically incorporated into the constitutions of such companies to the extent not excluded or modified, must be amended if the company is to be a sole director company.
Before the decision in Fore Fitness, the commonly held view was that model article 11(2) did not require a minimum number of directors but simply set the quorum for a board meeting, and that whenever a company had a sole director (including where the number of directors fell to one), by virtue of model article 7(2), the general rule set out in model article 7(1) did not apply, and the director could take decisions without regard to any of the provisions of the articles relating to directors’ decision-making (including model article 11).
Following the Fore Fitness judgment, it was a concern that the decisions and actions of sole directors could be challenged if a company has model articles. Indeed, in the Fore Fitness case, the Court decided that sole director did not have the authority to take actions on behalf of the company. This decision created unwelcome uncertainty for the huge number of UK companies which operate with only one director. The decision also appeared to be contrary to the Companies Act 2006, which permits private companies to have a single director; as well as parliamentary guidance, which states that the model articles do not provide for a minimum number of directors.
Developments in the Re Active Wear Case
In Re Active Wear Ltd [2022], the High Court reconsidered the proper interpretation of articles 7 (Directors to take decisions collectively) and 11 (Quorum for directors’ meetings) of the model articles for private companies, finding that the quorum provisions in model article 11(2) should not be construed as imposing a requirement for a company to have a minimum of two directors.
The Court considered the construction of Active Wear’s Articles of Association in relation to the key issue of whether a single/ sole director was entitled make a valid decision to appoint administrator at a time when the company might be insolvent. In particular, the Court considered the following provisions of the model articles:
The following key provisions of the Model Articles were of particular importance to the Court:
- Article 7(1): the general rule that decisions made by directors must be that of a majority decision, or a decision in accordance with article 8 which requires a unanimous decision.
- Article 7(2): Article 7(1) does not apply where the company has only one director..
- Article 11(2): states that the quorum for directors’ meeting may be fixed, but if not, the default is fixed to two.
- Article 11(3): restrictions apply to the directors’ decision making where the total number of directors is less than the required quorum. Directors can only decide to appoint further directors or hold a shareholder meeting to appoint further directors.
The Court commented that due to the structure of the model articles and these being clearly laid out in sections and sub-sections, the effect of model article 7(2) was to disapply all of the remaining provisions in the “decision-making by directors” section of the model articles when a company has a sole director – including the problematic model article 11(2). Consequently, the sole director’s decisions are not required to regard any subsequent provisions of the model articles relating to decision making. In essence, instead of model article 11(2) disapplying model article 7(2) as ruled in the Fore Fitness case, the judge said that model article 7(2) disapplied model article 11(2) when a company had a single director, very much in accordance with the way model articles had been widely interpreted before that decision.
In its Re Active Wear decision, the Court recognised the contradiction between its ruling and that in Fore Fitness, but noted the following key differences:
- Active Wear has only ever had the same sole director, whereas Fore Fitness had one director at incorporation and a different director before commencement of proceedings.
- Active Wear’s articles were unmodified, but Fore Fitness’ articles were a bespoke amended version of the model articles. It was noted that Fore Fitness had a specific bespoke article that required multiple directors for decisions at board meetings to be valid, therefore disapplying Model Article 7(2).
Conclusion
This Active Wear judgment reduces the uncertainty which flowed from the decision in Fore Fitness and is to be welcomed. The judge in the Active Wear case stressed that the presence of bespoke articles amending quorum provisions would be a key determining factor in the interpretation of model articles.
Although some uncertainty remains and any question of the capacity of a sole director will turn on the facts of each case, both cases show the importance and value of regularly reviewing articles of association to check they are fit for purpose and meet the requirements of a company and its shareholders.
If you have any queries on the issues raised, please contact Harender Branch, who heads up our corporate team at hkb@branchaustinmccormick.com
Branch Austin McCormick LLP
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