In January 2022, a decision of the High Court in connection with an unfair prejudice petition held that sole directors operating substantially under the Model Articles required a minimum of 2 directors to conduct business.
This caused consternation as, prior to the ruling in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch), it was widely accepted that article 7(2) of the Model Articles dispensed with the need to have a quorate board meeting, allowing a sole director to make decisions alone.
Model Article 7 states:
"(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
(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.
The decision, in relation to a company called Fore Fitness Investments Holdings Ltd, outlined that Model Article 7(2) only permitted a sole director to make decisions for the company if there are no other provisions within the articles that require more than one director, but that where certain articles require it to have at least two directors, e.g. if the articles set the quorum for directors’ meetings at two or more, the correct interpretation is that the Articles require at least two directors in office to make decisions for the company.
Fore Fitness Investments Holdings Ltd had modified articles in which specified directors were required to be present to properly constitute a quorum. On this basis, the judge held that the company was required to have two directors. The unaltered Model Articles also require a quorum of two directors in Article 11.
Therefore, the decision caused uncertainty, both for sole directors of trading companies, and for office holders where insolvency appointments have arisen from decisions of sole directors.
In one such case, Administrators sought directions from the Court. The resulting decision in Re Active Wear Ltd [2022] EWHC 2340 (Ch), which concerned a company which had unaltered Model Articles, is most welcome.
The Judge specifically noted that section 154(1) of the Companies Act 2006 specifically permits a private company to have only one director. Deputy High Court Judge John Martin KC concluded that the correct interpretation of the unamended Model Articles is that a sole director of a private company may take on his or her own any decision relating to the conduct of the affairs of the company, and that Article 7(2) specifically disapplies other provisions relating to directors' decision making.
Accordingly, in this case the (sole) director’s decision to appoint administrators was valid.
The Judge considered the Fore Fitness Investments Holdings Ltd decision, and considered the factor that dictated the result of that decision was the bespoke article requiring specified directors for a quorum, which allowed him to find that unaltered Model Articles enable a sole director in office to make decisions.
The Active Wear Ltd is also of interest to practitioners as the Judge took a pragmatic approach to a potential defect relating to the manner in which the statutory demand had been administered for the notice of appointment. The declaration was administered by video conference as permitted by the Temporary Insolvency Practice Direction, but the attestation omitted confirmation that the declaration was made in that manner. The Judge had no hesitation in exercising the power in rule 12.64 of the Insolvency Rules 2016 to declare that the defect did not invalidate the appointment.
Office holders will be reassured by the later decision, but will still need to ensure that any bespoke articles are carefully considered when taking appointments based on a decision of a sole director.
