Model Articles and decisions of sole directors – has common sense prevailed?

Are decisions of sole directors valid?

In May 2022, we reported on the High Court case of Hashmi v Lorimer Wing (Hashmi) which somewhat put the cat among the pigeons regarding the validity of decisions taken by a company's sole director where its articles comprised the Model Articles without amendment. 

As we reported at the time, this ruling went against general industry consensus which had been in place since the Companies Act 2006 (and its Model Articles) was first published in 2008. The judge’s decision in this case effectively meant that the Model Articles could not be used without amendment if there was to be only one director of the company. This could have negatively impacted thousands of small businesses which had been set up over the previous 14 years, in the event of any of them coming into dispute with a third party. 

Now, however, it seems that sense might have prevailed! 

Interpretation of Model Articles reconsidered 

In the case of Re Active Wear Ltd (Re AWL), the High Court has reconsidered the interpretation of Model Articles 7 and 11, the interplay between those articles, and specifically whether Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors. 

As a reminder, the relevant terms of the Model Articles include the following regulations under the section entitled “Decision-Making by Directors”: 

Article 7 (Directors to take decisions collectively):

(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 … [unanimously by all eligible directors]. 

(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 make decisions without regard to any of the provisions of the articles relating to directors’ decision-making

Article 11 (Quorum for directors’ meetings):

(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. 

(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. 

(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) call a general meeting so as to enable the shareholders to appoint further directors. 

In Re AWL, the sole director applied to the court for confirmation that his appointment of joint administrators of the company was valid, in light of the High Court’s decision in Hashmi. The company had only ever had one director and its articles were in the form of unamended Model Articles.

In this instance, the court decided that: 

• The Model Articles applied in their entirety, including the headings 
• Model Article 7 clearly stated that a sole director can take any decision relating to the conduct of the company on their own 
• The disapplication of provisions of the articles relating to directors’ decision-making clearly applied to all those provisions in the section headed “Decision-making by directors”, which include requirements as to quorum 

There may still be some tension between articles 7 and 11 of the Model Articles in the future, in particular where a company has had more than one director in the past, or where the Model Articles have been amended to some extent, such as to set a higher quorum for board meetings. Where a special article has required a quorum of, say, five directors, this would be considered a requirement for there to be more than one director in office. Therefore, in the event of a reduction in the number of directors to only one, the proviso in Model Article 7(2)(b) would apply, and the company could not rely on the remaining provisions of Model Article 7(2). 

What does this mean in practice? 

While this is good news for corporate lawyers and small businesses, the decision could still be departed from in a further High Court decision, or overturned by a decision of a more senior court. It is therefore still advisable to clarify the intended position in the articles or consider ratifying past key decisions of a sole director. The practicalities of this will still need to be carefully considered, to ensure that any decision to ratify or correct the position is not, in itself, open to challenge. If you would like to know more, or would like any advice on your options, please contact Liz Barton, Head of Corporate.