In Update 68, I provided an overview on the High Court ruling in relation to the ability of sole directors to make decisions on behalf of their company in relation to the Model Articles of Association chosen as the default for private limited companies.
The court then ruled in the first case that Model Article 11(2) (along with a bespoke article 16 contained in the company’s articles of association) was a provision which required a company to have more than one director, and therefore the sole director was not able to validly make decisions acting alone in reliance on Model Article 7(2).
Specifically, the Court then suggested that Model Article 11(2) should be deleted to enable sole directors to make decisions acting alone.
That was then, this is now it appears however as in the more recent case of Active Wear Limited, the High Court concluded that “the unambiguous effect of article 7” of the unamended model articles was to permit a sole director of a private company to make any decision in relation to the conduct of the affairs of the company on their own.
The Court found in this case that Model Article 11(2) was specifically disapplied by Model Article 7(2) in circumstances where there is only one director and there is no other provision requiring more than one director – which, in the case of the unamended model articles, there is not.
The Court marked this decision out as different to its last as in that case, the company had adopted a mix of bespoke articles alongside the model article including a bespoke article 16, which set a quorum of two.
It also said that the previous decision was specific to its facts and that Model Article 7(2) only failed to operate as a result of this bespoke article 16.
So where does that leave companies with a sole director now?
The current state of affairs would appear to be
- Both decisions still stand but the first has been very much qualified by the second;
- Where the Model Articles have not been amended, then decisions of a sole director will be valid;
- Historic decisions taken by a sole director of a private company with the Model Articles adopted without amendment should be valid, and therefore should not require a shareholder resolution to ratify; and
- It should be possible to make amendments to the Model Articles for a sole director company provided those amendments do not contradict Model Article 7(2).
However, for companies with a mix of model and bespoke articles where there is any doubt that they may contradict Model Article 7(2), the uncertainty remains and the sensible advice remains that it is likely that these articles will require amendment to specifically permit sole directors to act and reduce the quorum requirement to one. If amending the company’s articles (which would require shareholder consent) is not either practical or desirable, then a second director should be appointed to avoid any doubt as to the validity of decisions taken.
Regards to all