Sole directors and their decisions: a muddy landscape

This article was originally published in London Business Matters magazine.

If you are a sole director whose company has adopted model articles, it would be pertinent to keep track of some recent case law which may have generated uncertainty on the validity of your decisions.

In the case of Hashmi v Lorimer Wing 2022 EWHC 191 (also known as Re Fore Fitness Investments Holdings Ltd) (Re Fore Fitness), the High Court held that the model articles effectively do not allow for single director companies.

The relevant provisions of the model articles state: 

• Article 7(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 (Unanimous decisions).
• Article 7(2): if a company has only one director, and the company’s articles do not otherwise require it to have more than one director, the general rule (in Article 7(1)) does not apply, and the director can take decisions without regard to any of the provisions of the articles relating to director’s decision making. 
• Article 11(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.

Most corporate practitioners had interpreted Article 7(2) to mean that Articles 11(2) and 11(3) did not apply to sole director companies, however the High Court held that Article 11(2) did in fact impose a requirement for the company to have more than one director and therefore, if unamended, a sole director could not rely on Article 7(2) to make decisions.

However, in a subsequent case, Re Active Wear Limited (In administration) [2022] EWHC 2340 (Re Active Wear), a High Court judge held that Article 7(2) should be interpreted as disapplying all of the remaining provisions in the “decision-making by directors” section of the model articles, including the problematic Article 11(2), but only where there has never been more than one director in the company. This brought some relief for companies who have adopted unamended model articles and have only ever had one director, however there is still uncertainty for companies where there has been more than one director in the past, as Article 11(3) should still apply in those circumstances.

As both Re Fore Fitness and Re Active Wear were heard in the High Court, each decision has the same authority and until a higher court has had the opportunity to preside over a similar case, there remains uncertainty and companies are therefore advised to take caution and consider amending the articles of association of the company, if this is relevant.

Sole director and sole shareholder

If a company has a sole shareholder who is also a sole director and the company has adopted Model Articles, this provides that an executor of a deceased shareholder has the right to appoint a new director, under (under Model Article 17(2), where the individual has died.

However, if a company has adopted Table A articles (the default form of articles for companies incorporated before 1 October 2009), then issues can arise when no provision has been made for the transfer of assets on death, as Table A does not contain such a right.

In these circumstances, a new director cannot be appointed until the new shareholder or shareholders appoint them, and the new shareholder or shareholders cannot be entered into the register of members without a director approving this. The company is therefore stuck in limbo without a director until the court orders a rectification of the register of members and authorises the executors to carry out the rectification, which could result in the company not being able to trade or pay its employees and creditors.

If a company has a sole director and shareholder and has adopted Table A articles, it is therefore advised that the articles are amended so that personal representatives of the deceased have the right to appoint a director.