Sole director – to be or not to be?! The confusion created by recent case law…

When the Companies Act 2006 was introduced it was designed to reflect the fact that the majority of companies are small owner managed companies, with often only a sole director / shareholder and the associated implied “Model Articles” were designed to reflect this in a company’s constitution.

However, the March 2022 case of Hashmi V Lorimer-Wing cast doubt over the practicality of the Model Articles for companies that have a sole director when the High Court ruled that private limited companies that have adopted the Model Articles must have a minimum of two directors and, if a company required a sole director to make decisions on its behalf, then the Model Articles would need to be amended.

This ruling was based on a potential conflict between Model Article 7(2) and Model Article 11(2): Model Article 7(2) states that if the company has one director, then the general rule in respect of decision making by directors, taking place by way of a majority or unanimous decision, does not apply; whereas Model Article 11(2) states that the quorum for directors’ meetings must never be less than two.

This seemed to make a mockery of one of the drivers behind the Model Articles and ignore the fact that you can’t have a meeting with one person so the quorum requirement would be irrelevant.

Luckily, in October 2022, the case of Re Active Wear Ltd [2022] EWHC 2340 (Ch) found that the quorum provisions as set out in Model Article 11(2) (i.e. that the quorum for directors’ meetings must never be less than two), should not be interpreted as stipulating a requirement for a company to have a minimum of two directors. To interpret Model Article 11(2) in that way would deprive Model Article 7(2) of any practical meaning and, in conclusion, the Model Articles should be read as a whole.

Unfortunately, this ruling is being deemed to only apply when the company has only ever had one director. Therefore, if a company has a sole director but has had more than one director in the past, the position remains that the company will need to consider whether to amend their articles or appoint a second director, and potentially ratify any decisions previously made by a sole director.

Whilst the hope is that either a further case (or the Government) will override and clarify the position to reflect what must have been the original intentions, the current position means that we recommend that companies with sole directors should have their articles of association reviewed and potentially amended to ensure the sole director has authority to act – and to ratify previous decisions.

If you are unsure about the ability of your company to rely on sole director decisions, please contact Kate Gledhill on 0161 832 3434 or kategledhill@kuits.com