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New considerations for sole directors’ decision-making
If you are a sole director of a private company or you are advising a private company with a sole director, it is important to consider whether the sole director can validly take decisions alone where the quorum requirement in the company’s articles of association is expressed to be two directors. Market practice has always suggested that this is possible, however, in two cases last year, the High Court considered this issue. The outcome of those two cases has resulted in some uncertainty for sole directors and some additional considerations for sole director companies. In this article, we examine the High Court guidance and set out some practical steps that can be taken to ensure the validity of sole director decisions.
What the Model Articles say
The Model Articles for private companies include the following relevant provisions:
- Article 7(1): This sets out the general rule that decisions of the company’s directors must either be a majority decision at a meeting or unanimous decisions in accordance with Article 8.
- Article 7(2): Where a company only has one director and the company’s articles do not otherwise require it to have more than one director, the general rule above (namely, Article 7(1)), does not apply; and, instead, the sole director may take decisions “without regard to any of the provisions of the articles relating to directors’ decision-making”.
- Article 11(2): This states that the quorum cannot be less than two and that unless otherwise fixed, the default quorum is two directors.
- Article 11(3): Where the total number of directors is less than the quorum required, the directors must not take any decision other than a decision to appoint further directors.
Since the Companies Act 2006 came into force in October 2009, market practice has been to interpret Model Article 7(2) as taking precedence over any quorum requirements for two or more directors, enabling sole directors to take decisions on behalf of their companies. It has long been thought that this is how the Model Articles were intended to be interpreted, such that Model Articles 11(2) and 11(3) were considered not applicable by virtue of Model Article 7(2) where a sole director of the company is in office.
Do the new cases change the approach?
Early last year, the case of Re Fore Fitness Investments Holdings Ltd [2022] cast doubt on the validity of sole directors’ decisions in some circumstances.
In this case, a shareholder of the company brought an unfair prejudice petition under the Companies Act 2006. The company had responded by filing a defence and counterclaim. The shareholder then asked the court to strike out the defence and counterclaim on the basis that the company’s articles of association (bespoke articles based on the Model Articles) required a quorum of two directors. The shareholder asserted that the quorum requirements meant the sole director did not have the power to direct the company to make the counterclaim.
The company had a bespoke article requiring a quorum of two directors for board decisions but the articles also incorporated Model Article 7(2), which had generally been thought to override any quorum provisions. However, the High Court agreed with the claimant; it found that the requirement for a quorum of two directors was effectively a requirement for the company to have more than one director. As such, the court ruled that Model Article 7(2) was disapplied and the sole director could not validly make the counterclaim.
This judgment prompted another case. The administrators of Active Wear Limited (in administration) sought a High Court declaration that they had been validly appointed. This time, the High Court ruled in the company’s favour and decided the administrators’ appointment by the sole director of the company with unmodified Model Articles was valid. Notwithstanding the earlier Fore Fitness decision, the court found that where a company had one director and no provision of the articles required it to have more than one director, as was the case under the Model Articles, Model Article 7(2) provided that the general rule about directors’ decision-making did not apply and the sole director could therefore take decisions without regard to the provisions in the Model Articles relating to directors’ decision-making, including Model Article 11(2).
The court distinguished Fore Fitness on the grounds that in Fore Fitness the company had adopted bespoke articles which had been interpreted as including a requirement for the company to have more than one director whereas Active Wear had unamended Model Articles. The judge ruled that to read the unamended Model Articles such that the effect of the quorum requirement in article 11(2) ruled out the operation of article 7(2), would be to deprive article 7(2) of meaning if the sole director in Active Wear could not validly make decisions on behalf of the company. However, the judge also considered that Model Article 7(2) applied only where the company had only ever had one director.
Where sole directors now stand
These judgments have important implications for sole directors’ ability to take valid decisions alone where the quorum in their companies’ articles of association is two directors. Where a company has unmodified Model Articles and has always had a sole director, Active Wear provides some certainty that the sole director’s decisions will likely be valid. Where a company has bespoke articles or has ever had more than one director, the position is less clear. In which case, the company should consider: appointing one or more additional directors to the board of the company; or amending the company’s articles of association, in particular Model Article 11(2), to make clear that the sole director can form a quorum; and ratifying any decisions made by the sole director which may be a cause for concern.
It is important to remember that both decisions are High Court decisions and therefore carry the same weight. While Active Wear provides some comfort and clarification, it remains to be seen if there will be further challenge on this issue. For now, sole director companies and their advisers will need to consider the practical implications for decision making and act accordingly to avoid potential challenge.
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