Insight
The question of whether sole directors can make valid decisions under the model articles was recently highlighted following two High Court cases: Hashmi v Lorimer-Wing and Fore Fitness Investment Holdings Limited [2022] EWHC 191 (Ch) (“Fore Fitness”) and Re Active Wear Limited [2022] EWHC 2340 (Ch) (“Active Wear”). Although the cases differed in terms of one company having completely adopted the model articles (Active Wear) and the other using model articles in conjunction with their own bespoke articles (Fore Fitness), the main point being the validity of sole directors’ decisions under the model articles arose.
Where a company has one director, the model articles have been notoriously unhelpful when it comes to regulating decision-making. The reason for this is the conflicting nature between model article 7(2) and 11(2). The former allows a sole director to make decisions if no other provisions of the company’s articles require there to be more than one director, and the latter says that the quorum must never be less than two directors.
In the case of Fore Fitness, the High Court found that the company adopted model article 7(2) along with bespoke article 16, which adopted article 11(2), requiring the company to have a quorum of two directors. Here the sole director was not able to make valid decisions by acting on reliance of article 7(2); the fact that the bespoke articles required a quorum of two directors was enough to disapply article 7(2) entirely. It was suggested that article 11(2) should function as a caveat to article 7(2).
The High Court in Active Wear reached a different conclusion to that in Fore Fitness, as the company here had used unamended model articles and from incorporation operated with one director. The court held that the effect of article 7(2) when used without any other provisions requiring more than one director made article 11(2) redundant. It was considered that model article 11(2) could not have the same effect as in Fore Fitness as it would deprive model article 7(2) entirely of any practical meaning. However, the judge in this case said that article 7(2) is most likely to prevail only where there has only ever been a sole director and unamended model articles.
As both are High Court decisions, neither can be said to ‘trump’ the other and therefore we are left with two contradicting judgments on the validity of sole directors’ decisions. Until we receive further judicial clarity or until government intervention, it is evident that all these cases did was highlight the conflict existing between the model articles and left companies with sole directors vulnerable and confused.
Going forward, companies with sole directors should look at amending their articles to make clear that sole directors can make valid decisions. Alternatively, it may be advisable to appoint a second director to avoid the conflict altogether.
If you require a thorough review of your company’s articles, please feel free to contact a member of our team who will be able to explore your possible options.