Sole Directors: Fore Fitness of the Model Articles

The High Court have recently made a controversial decision in the case of Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) (Re Fore Fitness), which significantly impacts on a sole director’s ability to operate under the Model Articles.

The case involves a dispute between Mr Lorimer-Wing, the sole director of Fore Fitness Investments Holdings Limited, and a former director, Mr Hashmi.  Mr Hashmi applied to have a counterclaim made by Mr Lorimer-Wing struck out on the basis that the company’s articles of association - the document setting out rules which govern the running of a company - required there to be two directors in order for a board meeting to be quorate.  As such, Mr Hashmi contended, Mr Lorimer-Wing did not have the power, as a sole director, to direct the company to file the counterclaim.

The company’s articles were Model Articles - the default articles of association prescribed by the Companies Act 2006 - modified by the addition of some bespoke articles.  The High Court scrutinised three provisions of the company’s articles:

Model Article 7(2)

If:

• the company only has one director; and
• no provision of the articles requires it to have more than one director…the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Model Article 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…

Bespoke Article 16

…the quorum for meetings of the Board shall be two Directors…

The relationship between Model Articles 7(2) and 11(2) has historically caused confusion.  Mr Lorimer-Wing asserted that Model Article 7(2) should prevail as it governs the position where, as a matter of fact, there is just one director, and this was the basis of his authority to commence the counterclaim on behalf of the company.  He argued that neither Model Article 11(2) or Bespoke Article 16 require a minimum number of directors, they simply apply if there is more than one director.  This has been a popular interpretation of the Model Articles by lawyers in practice.

However, the High Court determined that Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors.  The Judge found that on that basis, the exception in Model Article 7(2) was not met, Mr Lorimer-Wing was not able to take decisions on his own, and the counterclaim was struck out.

It is of course possible (and some say likely) that the judgment will be challenged and overturned in future cases, but for now, there are some important considerations to take on board.

Firstly, it is now clear that the Model Articles, unless carefully amended, will be unsuitable for sole director companies, and those at risk of becoming sole director companies due to an unexpected change in directorship.  It will be important to consider this when incorporating new companies.

For existing companies, it would be wise to review the current articles of association to ensure they provide that if there is only one director, that director is able to validly take decisions.  Even though the issue arose in Re Fore Fitness in the context of litigation, it is everyday business decisions which are at risk of being affected and invalidated by sole directors having a lack of authority to act, such as entering into agreements or dealing with shares.

There is also the possibility that historic decisions taken by sole directors could be challenged in light of the case.  It may therefore be necessary to obtain retrospective shareholder approval of decisions taken by sole directors if the articles of association do not provide the necessary authority.

If you require advice relating to your company’s articles of association, please call the Corporate team on 0113 207 0000.