Following the controversial decision of the High Court in Hashmi v Lorimer-Wing in February 2022, a further decision of the High Court in Re Active Wear Limited [2022] may have paved a way for sole director companies to operate sufficiently under the unamended, adopted model articles.
The case concerned whether a private company had the ability to appoint administrators with a sole director, and questioned whether the adopted model articles, without amendment, were valid and able to provide the sole director with such capacity.
February 2022 vs. October 2022 – what has changed?
As previously discussed, the outcome of Hashmi v Lorimer-Wing back in February left uncertainty amongst sole director companies in terms of their authority to take actions on behalf of the company, since it was ruled that sole directors did not have the power to make any decisions unless article 11(2) was disapplied.
Model Article 7(2): “If a company has only one director and there is no provision in its articles for it to have more than one, the general rule does not apply. Under these circumstances, the sole director “may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”.
Model Article 11(2): “The quorum for directors’ meetings may be fixed from time to time, but it may never be less than two. Unless otherwise fixed, it is two.”
Despite being contrary to not only s.154(1) of the Companies Act 2006 permitting private companies to have a single director, this also went against parliamentary advice, stating that the model articles do not provide for a minimum number of directors. Given the level of ambiguity left behind from this decision, it is no wonder that the Courts took the swift decision to change this in the case of Re Active Wear Limited [2022] which we will discuss below.
The Judge in this case discussed the approach taken in the case of Hashmi v Lorimer-Wing and stated that, instead of model article 11(2) disapplying model article 7(2) as was ruled in this case, model article 7(2) should disapply model article 11(2) when a company has a single director. The reason for this is because the Judge deemed it incorrect to read the unamended articles so that model article 11(2) would rule out model article 7(2), because to do so would simply displace the purpose and practicality of model article 7(2) in any event.
It was ruled that the Articles should be read as a whole and to not do so, would create a general consensus that the articles must be amended before article 7(2) can operate in the case of single director companies.
What if the company changes from a multiple director company to a sole director company?
The Judge concluded that in cases where the articles expressly require several directors for a meeting to be quorate and the company initially has sufficient number of directors to meet this quorum, but then becomes a single director company, article 11(3) should apply instead of article 7(2), namely that:
Model Article 11(3): “If at any moment the total number of directors is less than the quorum, the directors must not take any decision other than: (a) to appoint further directors; or (b) to call a general meeting to enable the shareholders to appoint further directors.”
This means that despite this decision providing some comfort to sole director companies in their capacity to act, with unamended Model Articles, at least where the company has only ever had a sole director, the same issue remains for eventual sole directors of a multiple director company, who can then only appoint additional directors, so quorum provisions are met.
Although the decision of the High Court in this case was a step in the right direction, the outcome is not entirely ideal for every company, and hopefully the principle will reach a higher court soon to deal with this final point. Until then, caution should be exercised when dealing with company articles and amendments to the model articles should be considered to clarify the effect of model article 11 and ratify select previous decisions of sole directors of such companies.
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