Advice for companies with sole directors – do they have authority to act?

Background

In Hashmi v Lorimer-Wing (Re Fore Fitness), the High Court considered this question specifically where the company’s quorum for decision making by directors is two, under its relevant articles of association, but the company only has a sole director.

In that case the High Court found that a bespoke article analogous to Model Article 7(2) (Directors to take decisions collectively) imposed a requirement for a company to have a minimum of two directors to make decisions on behalf of the company.

The finding in this case caused uncertainty as well as a legal and compliance issue for sole director companies, particularly those incorporated with model articles, as it raised a question over a sole director’s authority to act on behalf of a company.

Further clarity in Re Active Wear

Subsequently the case of Re Active Wear has provided some clarity on the issue.

The judgment in Re Active Wear particularly focuses on model articles 7(2), 11(2) and 11(3):

• 7(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 take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
• 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.
• 11(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) to call a general meeting so as to enable the shareholders to appoint further directors.

Facts

The High Court had to determine the validity of the appointment of joint administrators of the respondent company by the sole director. The company had only ever had one director and the company’s articles of association were the model articles prescribed for private companies limited by shares. The administrators applied to the court for a declaration as to the validity of their appointment, in light of the decision in Re Fore Fitness.

The issue at hand was whether the director was entitled under its articles to make the decision to appoint.

Analysis

The judgment in Re Active Wear provides some clarity for sole directors of companies with unamended model articles who have always only had one director, as it is now clear that they do not need to amend their articles or appoint a second director to manage the company’s business.

However, the judgment does create room for confusion given that different approaches will need to be taken by different sole director companies depending on its director history and the form of its articles (model articles or equivalent bespoke articles). If in any doubt, sole director companies should seek specific legal advice on their company’s position.

For companies with sole directors that previously had multiple directors, or that have bespoke or amended model articles relating to a quorum for director decision making of two or more, to avoid any doubt as to the validity of decisions, either:

• amendments to the company’s articles will be required to specifically amend the quorum requirement and allow sole directors to act. The amendments will need to be proposed by the shareholder(s) under section 292 of the Companies Act 2006 as the director will not have authority to do so; or
• a second director will need to be appointed.

If you have any queries regarding a company’s articles of association, a sole director’s authority to act, or other corporate constitutional matters, please get in touch with our Banking or Corporate team who will be able to assist.