A sigh of relief for sole directors: Re Active Wear Limited (In administration)

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In the recent case of Re Active Wear Limited (In administration) [2022] EWHC 2340 (Ch) the High Court held that a sole director would have the authority to make decisions on behalf of a company which had adopted Model Articles without modification.

This is a much welcomed decision for sole directors, whose authority to act was brought into question in the case of Re Fore Fitness Investments Holdings [2022]. In Fore Fitness, the High Court held that at least two directors were required to make valid decisions on behalf of a company, where that company had adopted the Model Articles. This decision challenged the longstanding interpretation of the Model Articles by Companies and legal professionals.

Re Active Wear

In Active Wear, the company had adopted the Model Articles, without modification, when it was incorporated in June 2015 and had always been operated by a sole director. The company had been going through a difficult period and was at risk of insolvency, which led to the sole director deciding to appoint administrators and putting the company into administration. The decision to appoint administrators was brought into question and the Court set out to assess whether or not the sole director had the authority to make this decision.

The Court considered the following key provisions of the Company’s articles:

• Model Article 7(1) sets out the general rule that decision making by directors must be either at a board meeting or by a resolution in accordance with Model Article 8.
• Model Article 7(2) states that where a company only has one director, and its articles of association do not require it to have more than one director, the general rule does not apply and the director may make decisions without having regard to the other provisions of the articles of association relating to directors’ decision-making.
• Model Article 11(2) allows the directors to fix the quorum for directors’ meetings from time to time, but it must never be less than two directors and, unless otherwise fixed, it shall be two.
• Model Article 11(3) states that if the number of directors at a directors’ meeting is less than the quorum required, then the directors must not decide any decision other than to appoint additional directors or call a general meeting to enable the shareholders to appoint further directors.

The Court distinguished the facts of Active Wear from Fore Fitness and emphasised that:

• In Active Wear the company had only ever had the same sole director.
• In Fore Fitness the company had modified the Model Articles and in particular, there was a modified article that required two directors to be present at a board meeting for that meeting to be quorate.

For these reasons, the Court in Active Wear held that Model Article 7(2) would apply when the Model Articles had been adopted without modification. The Court took the view that the effect of Model Article 7(2) meant that Model Article 11(2) and Model Article 11(3) could be disregarded and therefore, the sole director had the authority to validly make decisions of the board and consequently, appoint the administrators.

Active Wear provides comfort for those Companies who have adopted unmodified Model Articles and only ever had the same sole director. However, the position remains unclear in two notable circumstances:

1. Where a company has adopted unmodified Model Articles but has appointed additional directors in the past.
2. Where a company has adopted modified Model Articles, especially if the articles relating to the quorum of a board meeting has been modified.

It is expected that further clarification will be provided by the Court but for the time being it is advisable to proceed carefully.

If you would like us to review your Company’s articles of association, in light of this article or for any other reason, then please contact our Commercial Team on 01603 666001 or email admin@rogers-norton.co.uk

*This article is provided for general information purposes only and does not constitute legal or any other professional advice.