Model Articles deemed suitable for sole director companies

A recent decision of the High Court in Re Active Wear Limited [2022] EWHC 2340 (Ch) has suggested that the model articles for private companies are suitable for companies with a sole director appointed, in contrast to another recent decision of the High Court in Hashmi v Lorimer-Wing which we blogged about recently.

Background

The case involved whether a private company had the ability to appoint administrators when it had only one director appointed.
The company's articles of association were the model articles for private companies (the Model Articles), adopted without amendment.

Article 7 of the Model Articles 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.

Article 11(2) of the Model Articles states:

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

Judgment

The Deputy Judge hearing the case held that the sole director of this company was able to make decisions on her own and, accordingly, the appointment of administrators was valid.

The Deputy Judge held that Article 11(2) of the Model Articles is specifically disapplied by Article 7(2) in circumstances where there is only one director and there is no other provision requiring more than one director, and held that there is no other provision in the Model Articles requiring more than one director.  The Deputy Judge's rationale for Article 11(2) being specifically disapplied by Article 7(2) is that both articles are in contained in the same section of the Model Articles, headed "Decision-making by directors".

The Deputy Judge distinguished this case from the decision in Hashmi v Lorimer-Wing (also known as Re Fore Fitness) on the basis that in Hashmi v Lorimer-Wing the Model Articles had been amended to include a bespoke article 16 which stated that the quorum for meetings of the board was two directors.  The Deputy Judge in Re Active Wear concluded that the decision in Hashmi v Lorimer-Wing was specific to its facts and that Model Article 7(2) only failed to operate as a result of this bespoke article 16.  By contrast, as in Re Active Wear, where the Model Articles have not been amended, then decisions of a sole director will be valid.

Analysis

The main conclusion from the present case is that Model Articles are suitable for adoption (without amendment) by private companies with a sole director – in contrast to the opposite conclusion which was reached from the Re Fore Fitness judgment.

Both the present case and Hashmi v Lorimer-Wing are High Court judgments (meaning that the present case cannot overrule the Hashmi v Lorimer-Wing judgment).  However, the Deputy Judge in the present case has distinguished Hashmi v Lorimer-Wing if not quite into obscurity, certainly into a narrow field of application.  Therefore, it can be concluded that Model Articles are suitable for adoption (without amendment) by private companies with a sole director. Equally, it should be possible to make amendments to the Model Articles for a sole director company provided those amendments do not contradict Model Article 7(2).  It is also the case that historic decisions taken by a sole director of a private company with the Model Articles adopted without amendment should be valid, and therefore should not require a shareholder resolution to ratify.