Recent case law has called into question the authority of a sole director to bind the company in certain circumstances. Bank's beware of falling foul of this technicality!
All limited companies are required to have articles of association as part of their constitution, which set out the legally binding rules which govern the company's directors when making decisions and running the company. A company may adopt bespoke articles or the Model Articles set out in the Companies Act 2006. However, a number of recent cases have brought into question the authority of sole directors to bind a company or make decisions effectively, if the company has adopted the Model Articles (without amendment).
Sole director authority under Model Articles
Despite s154 of the Companies Act 2006 stating that a private company need only have one director, Model Article 11 say:
- no proposal can be voted on unless there is quorum at the board meeting (Article 11(1)); and
- the default quorum of directors at board meetings must never be less than two (Article 11(2).
Therefore, if the quorum is not met, the only decisions the directors can make are to either:
- appoint further directors (Article 11(3)(a)); or
- call a general meeting to enable the shareholders to appoint further directors (Article 11(3)(b)).
Article 11 would therefore suggest that sole directors do not have authority to make valid decisions under the Model Articles. However, Article 7(2) says that:
- if a company has a sole director (Article 7(2)(a)); and
- no provision of the articles requires the company to have more than one director (Article 7(2)(b)),
then the director may take decisions without regard to any of the provisions of the articles relating to directors' decision-making.
Confused? The application of these contradictory articles was considered by the courts in the following recent cases.
Recent case law
Hashmi v Lorimer-Wing (Re Fore Fitness Investments Holdings Ltd) [2022] EWHC 191 (Ch) considered the interaction of Article 7(2) and Article 11(2) of the Model Articles. The company had amended Model Article 11(2) to include a requirement for specific directors to be present at a board meeting to form a quorum. It was held that Article 7(2) did not apply, and the sole director did not have authority to take any decisions other than to appoint more directors.
Re Active Wear Ltd [2022] EWHC 2340 (Ch) considered the same issue, but here the company had adopted unamended Model Articles and had only ever had one director. It was held that Article 11(2) does not have the effect of requiring a company to appoint more than one director and that, unlike in Re Fore Fitness, the purpose of Article 7(2) is to allow a sole director to act on their own and disregard the restrictions set out in Article 11. It was also discussed in Re Active Wear that the decision in Re Fore Fitness was considered to be specific to its facts because the Model Articles had been amended.
But the High Court also suggested ( as an aside) that Article 7(2) only has the effect of allowing a sole director to take decisions on their own where the company has never had more than one director.
What about a company which previously had multiple directors but now has a sole director?
The cases above highlight the lack of clarity for companies, particularly those with a history of a varying number of directors. More recently, Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) provides some potential clarification, with the case focussing on whether a sole director of a company with Model Articles can resolve to file an application for administration, despite previously having had more than one director. The court found that, where a company has adopted unamended Model Articles, Article 7(2) had the effect of disapplying the directors' decision-making provisions in Article 11 in their entirety and a sole director has authority to take all decisions of the company, with the past number of directors being an irrelevant consideration.
What does this mean for you?
It is important to note that the cases mentioned above were heard in the High Court. High Court decisions are persuasive but not binding, so whether the outcome in Re KRF Services is followed in other decisions will be open to a future court. However, in the meantime, we advise lenders to take a cautious approach to avoid a situation where the authority of a sole director to bind a borrower can be challenged. In these circumstances, we would suggest that a borrower company either appoints another director or amends the articles in line with Article 11(3).
