A recent decision of the High Court in Re Active Wear Limited  EWHC 2340 (Ch) (Re Active Wear) has suggested that unmodified model articles for private companies are suitable for decision making for companies with a sole director. This differentiates from the decision in Hashmi v Lorimer-Wing (also known as Re Fore Fitness Investments Holdings Ltd) 2022 EWHC 191 (Ch) (Re Fore Fitness) where we asked “Is it time to check your articles of association?”
Background to the case
The Re Active Wear case involved whether a private company had the ability to appoint administrators when it had only one director. The Company had adopted the model articles for private companies (Model Articles) without any amendment or adaptation. The case revolved around the interpretation of Article 7 of the Model Articles which 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 which 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.
And Article 11(3) of the Model Articles which states:
(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision –
(a) to appoint further directors, or
(b) to call a general meeting so as to enable the shareholders to appoint further directors.
It had previously been decided in Re Fore Fitness that Article 11(2) should be interpreted as imposing a requirement that a company must have a minimum of two directors in order for the quorum to be met therefore disapplying Article 7(2).
Decision in Re Active Wear
The judge concluded that under the unamended Model Articles the “unambiguous effect of Article 7” is that a sole director of a private company may make any decision relating to the conduct of the company on their own and that Article 11(2) is “specifically” disapplied by Article 7(2) where there is only one director and no other provision requiring more than one director.
Distinguishing factors from Re Fore Fitness
The judge distinguished Re Active Wear from Re Fore Fitness on two main points;
- that Re Fore Fitness had adopted a mix of bespoke articles as well as the Model Articles and that the existence of bespoke Article 16 which stated that the quorum for meetings was two directors meant that Article 7(2) was disapplied in that instances; and
- that there was only ever one director of Re Active Wear, whereas there had been previously been multiple directors of Re Fore Fitness.
The judge highlighted the issue with going from having multiple directors to one by stating that there was an “apparent tension” between Article 7(2) and Article 11(3) where the number of directors drops to one from a higher number, and in that instance Article 11(3) applies thereby disapplying Article 7(2).
Important points to note
Whilst Re Active Wear is not a complete U-turn on the decision of Re Fore Fitness, it does give some clear distinguishing points to note, namely that:
- if the Model Articles have been amended to include bespoke articles which set the quorum for board meetings at more than one, Article 7(2) will be disapplied; and
- if the company has previously had more than one director, Article 11(3) is likely to apply, and Article 7(2) will be disapplied.
Therefore, although the decision will have afforded some comfort to companies who have only ever had one director and have adopted unamended Model Articles, those with bespoke articles and having had multiple directors acting will find little solace in the decision. For these companies, the articles will likely require amending to permit a sole director to act by reducing the quorum requirement, or, if this is not viable due to the requirement of shareholder approval, a second director should be appointed.
How Moore Barlow can help
If this is something that you would like to discuss further then a member of the Corporate Law Team would be happy to help.
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