When you create a company, you can either use the default Articles of Association (the rules which sit behind your company) or create your own bespoke Articles of Association. If you use the default, these are called the Model Articles.
Recent case law has exposed the ambiguity surrounding the Model Articles in relation to a sole director’s ability to make decisions on behalf of the company on his/her own. In Re Active Wear Limited  EWHC 2340 (Ch), the High Court ruled that the appointment of administrators by a sole director of a company with Model Articles was valid, contrary to the High Court’s earlier decision in the case Re Fore Fitness Investments Holdings Limited  EWHC 191 (Ch).
Background – Re Active Wear vs Re Fore Fitness
In both cases, the High Court had looked closely at the wording of Model Articles 7 and 11 in relation to a sole directors’ ability to make decisions on behalf of the company.
Model Article 7(2) provides that where a company only has one director and the company’s articles do not require the company to have more than one director, the general rule will not apply. Instead, the sole director can “take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”.
Further to this, Model Article 11(2) states that the quorum (minimum number of directors) for board 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”.
However, if the total number of directors at the time is less than the required quorum i.e. just the one, no decision must be made by the directors other than decisions relating to the appointment of further directors (Model Article 11(3)).
In Re Fore Fitness, a question had arisen about the validity of a notice served by the company of a counterclaim. At the time, the company had a sole director and the articles were based on the Model Articles but with some modifications. Of particular significance was the inclusion of bespoke article 16, which required that at least two directors were present at board meetings to constitute a quorum.
Re Active Wear, on the other hand, was concerned with the validity of the appointment of company administrators, a decision that had been taken by a sole director using the out-of-court route under paragraph 22, Schedule B1 of the Insolvency Act 1986. Here, the company had adopted unmodified Model Articles and had always had a sole director.
The Decision | Sole Directors
In Re Fore Fitness, the High Court agreed that the provisions outlined in the company’s articles required at least two directors to satisfy the quorum for directors’ (board) meetings. The inclusion of bespoke article 16 along with Model Article 11(2) had set this quorum and subsequently prevented the sole director from being able to rely on Model Article 7(2). As a result, the sole director was not authorised to serve notice of the counterclaim, and thus the counterclaim was declared void.
In Re Active Wear, where the company’s articles were based solely on the Model Articles, the deputy judge concluded that the “unambiguous effect of article 7” was that it authorised sole directors to take decisions on behalf of the company on their own. The High Court further noted that article 11(2) had been disapplied by article 7(2) in circumstances where a company has a sole director, and no additional directors are required according to the articles.
Implications for Sole Directors
Where there is a sole director of a company with unmodified Model Articles, the judgment in Re Active Wear is welcomed as it recognises that such sole directors have the authority to take decisions relating to the company’s affairs on their own. This decision also outlines the widely adopted approach that courts take regarding the interpretation of the Model Articles and their application to companies with sole directors.
However, the deputy judge in Re Active Wear also noted the ‘tension’ between Model Articles 7(2) and 11(3) where the number of directors in a company drops to one from a higher number, and thus that article 7(2) may only apply where a company has never had more than one director. This will be of little reassurance to a company with a sole director who previously acted alongside co-directors.
Whilst the decision in Re Active Wear provides some comfort for companies with sole directors in preserving their decision-making powers, the judgment in Re Fore Fitness emphasises the limitations a sole director may face regarding their ability to take decisions on behalf of the company, particularly where the company has adopted modified Model Articles.
It is always best to have bespoke Articles of Association to ensure that a sole director can take decisions freely on their own.
If you are seeking advice or have any questions in relation to this article, you can contact our Corporate and Commercial team.