Sole directors and the model articles: The High Court clash that continues to shake UK private companies

The question of whether a sole director can validly make decisions for a company who has adopted unamended Model Articles continues to be a pressing concern for company owners, directors, and advisers alike.

To recap, the High Court waded into the murky waters of the Model Articles in Re Active Wear Ltd [2022] EWHC 2340 (Ch), a decision which re-ignited the debate about whether or not a sole director has the authority to act under the unamended Model Articles. The result is a direct clash with the earlier and much-criticised judgment in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) (Re Fore Fitness). Unfortunately, practitioners are now left with two irreconcilable first-instance authorities – and no binding appellate guidance – on an issue that affects thousands of private companies across the UK.

Re Fore Fitness – the starting pistol

The initial Fore Fitness case concerned a company that had adopted unamended Model Articles but had overlaid a bespoke two director quorum provision. Mr Lorimer-Wing, the sole director, relied on Model Article 7(2) – the well-known “sole-director carve-out” – to commence a counterclaim. Mr Hashmi argued that the counterclaim was void because Model Article 11(2) (and bespoke article 16.1) required at least two directors for a meeting to be quorate.

The Court preferred Mr Hashmi’s argument, and held that:

1. Model Article 11(2) is not merely a procedural quorum rule; it imports a substantive requirement that the company must in fact have at least two directors; and
2. Since the articles “required” more than one director, Model Article 7(2) never effectively “switched on.”

The immediate practical message was stark: a company wishing to operate with a sole director must amend its Model Articles – otherwise every act of the sole director is vulnerable to challenge.

Re Active Wear – the counter-blast

Just seven months later, the High Court in Active Wear took the exact opposite view, though on materially different facts. In Re Active Wear, the company had adopted unamended Model Articles and had only ever had one director since incorporation.

Deputy High Court Judge John Martin KC held that the language of Model Article 7(2) was “unambiguous”: if (i) the company in fact has only one director and (ii) no other article requires it to have more than one, then “the general rule about decision-making by directors does not apply” and the sole director “may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”.  In other words, Model Article 11, in its entirety, is disapplied, and no amendment to the Model Articles is needed.

While the Judge expressly declined to overrule Fore Fitness, he was upfront that treating Article 11(2) as a compulsory “minimum-two-director” rule would deprive Article 7(2) of any purpose. However, he also offered the following important caveat, in obiter:

• Article 7(2) only works where the company has never had more than one director.
• If a company once had two or more directors and the board later shrinks to one, Article 11(3) bites and the remaining director is stripped of power until another director is appointed or the shareholders intervene.

Where does this leave sole-director companies?

1. Two directly conflicting first-instance decisions. Fore Fitness says sole directors cannot rely on unamended Model Articles; Active Wear says they can (but only if the company has always had a single director since its incorporation). Neither is binding precedent on another High Court judge, let alone the Court of Appeal.
2. Regulatory and transactional uncertainty. Banks, counterparties and professional advisers are already querying the authority of sole directors who sign documents under the unamended Model Articles. A prudent acquirer or lender is unlikely to take comfort from Re Active Wear alone.
3. Practical Guidance. The industry consensus, reinforced by leading commentators, is that until the Court of Appeal (or a differently constituted High Court) definitively resolves the conflict, companies should assume the Fore Fitness risk remains. In other words, even if a company has operated since day one with a sole director, the safer course would be to amend the Model Articles.

Conclusion

Active Wear provides welcome support for the long-held market view that the unamended Model Articles permit a “true” sole-director company. Nevertheless, the earlier Fore Fitness decision still stands, and there is no higher court authority to break the deadlock. Until that happens, the prudent, and most widely adopted, approach is to amend the Model Articles in every instance where the company either is, or could become, a sole-director company. A short special resolution today could prevent a costly challenge tomorrow.

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