The Powers and Pitfalls of Sole Directors in Private Companies
The Powers and Pitfalls of Sole Directors in Private Companies: A Summary of Two Recent High Court Cases
In this article, I will discuss the implications of two recent High Court cases that have examined the decision-making powers of sole directors in private companies: Hashmi v Lorimer-Wing and Fore Fitness Investment Holdings Limited  EWHC 191 (Ch) (“Fore Fitness”) and Re Active Wear Limited  EWHC 2340 (Ch) (“Active Wear”).
All you need to know in less than 100 words
The decision-making powers of sole directors in private companies are not absolute and may be subject to various restrictions or requirements under their company’s articles. It is essential for sole directors to understand and comply with their company’s articles, especially if they have adopted or modified the Model Articles. It is also advisable for companies to review their articles regularly and ensure that they reflect their current needs and circumstances. If there is any doubt or dispute about the interpretation or application of the articles, legal advice should be sought as soon as possible.
Both cases involved companies that had adopted the Model Articles for Private Companies Limited by Shares (the “Model Articles”) as their baseline articles, with some bespoke amendments. The Model Articles are a set of default articles that can be used by private companies, but they can also be modified or replaced by bespoke articles to suit the specific needs of each company.
One of the key issues that arose in both cases was the interpretation of Article 7(2) of the Model Articles, which provides that:
Where 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 about directors’ decision-making does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
The general rule about directors’ decision-making refers to Article 7(1), which states that decisions of the directors must be either by majority decision at a meeting or by unanimous written resolution.
The question was whether Article 7(2) allowed a sole director to act on behalf of the company without regard to any other provisions of the articles that might limit or restrict their powers, such as quorum requirements or special voting rights.
In Fore Fitness, the company had a bespoke article that required a quorum of two directors for board meetings, one of whom had to be an investor’s director and one an executive. The company only had one director at the time when it approved and filed a counterclaim against a shareholder who had brought an unfair prejudice petition. The shareholder argued that the counterclaim was invalid because the sole director did not have the authority to act without a quorum.
The judge agreed with the shareholder and held that Article 7(2) did not override the bespoke quorum requirement. The judge reasoned that Article 7(2) only applied where the company’s articles did not otherwise require it to have more than one director, and that a quorum provision logically implied such a requirement. Therefore, Article 7(2) was disapplied and the sole director could not act without a quorum.
In Active Wear, the company had no bespoke articles and relied on the Model Articles in their entirety. The company had two directors at first, but one of them resigned shortly before a board meeting where a resolution was passed to appoint administrators. The remaining director argued that he had validly passed the resolution as a sole director under Article 7(2).
The judge disagreed with the director and held that Article 7(2) did not apply in this case. The judge distinguished Fore Fitness on the basis that there was no bespoke quorum provision in Active Wear’s articles. Instead, the judge relied on Article 11(3) of the Model Articles, which provides that:
Where the total number of directors for the time being is less than the quorum required for directors’ meetings under article 11(2), 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 shareholders to appoint further directors.
The judge interpreted Article 11(3) as imposing a restriction on decision-making by sole directors where there was originally more than one director. The judge said that Article 11(3) was not part of the general rule about directors’ decision-making under Article 7(1), but rather an exception to it. Therefore, Article 7(2) did not disapply Article 11(3), and the sole director could not act without calling a general meeting or appointing another director.
These cases demonstrate that the choice of articles of association for private companies with sole directors can have significant consequences for their decision-making and governance. The model articles may not be suitable for such companies, especially if they are combined with bespoke articles that create additional requirements or restrictions. Companies should review their articles carefully and consider whether they need to amend them to reflect their specific circumstances and objectives.
If you need any advice on this matter, Blake-Turner Solicitors corporate team can assist you with drafting or reviewing your articles of association and advising you on your rights and obligations as a director or shareholder.