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Sole Director Companies – Two Recent Cases

Date Added 16.11.22

Sole Director companies are highlighted in two recent legal cases which shone the spotlight on the importance of checking and complying with the company’s articles of association.

Re Fore Fitness Investments: controversial judgement?

Re Hashmi v Lorimer-Wing and Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch) (Fore Fitness), a recent decision by the High Court, appeared to have broad ramifications for companies with a single director that uses the Model Articles. In this case, the judge overruled Model Article 7(2), which permits a sole director to generally act on behalf of the company without any restrictions, and determined that the company’s articles of association, as amended Model Articles, required the quorum requirement to be satisfied by the attendance of at least 2 directors at board meetings.  This decision was based on the fact that the Model Articles had been amended and bespoke clauses included.

Decisions made when there was just one director in office were therefore invalid since the articles of association had to be interpreted as requiring the appointment of at least one additional director to fulfil the requirements for quorum under the customised articles.

Many questioned the Fore Fitness judgment’s potential third-party effects on businesses that adopted or changed Model Articles, as well as the potential requirement to appoint a second director to review and ratify all of the historic decisions taken by the sole director.  The judgement also appeared to impact companies with unamended Model Articles.  In particular, lenders have been quick to include provisions in their documentation to reduce their risk when dealing with sole director companies.

Re Active Wear Limited: return to normality

Following its ruling in Fore Fitness, the High Court decided in Re Active Wear Limited [2022] EWHC 2340 (Active Wear) after taking the Fore Fitness ruling into account. Fore Fitness’s situation was slightly different from Active Wear since Active Wear adopted the Model Articles without making any changes.

Where the Model Articles are adopted, the judge in Active Wear concluded that a sole director can typically act on behalf of the company without any restrictions because Model Article 11(2) will be disapplied by Model Article 7(2).  This decision has essentially re-established the position ante-bellum and company lawyers can breathe easier again.

Conclusion

Although Active Wear provides clarity and comfort to companies with sole directors using the Model Articles, this serves as an important reminder to revisit and ensure your company’s articles of association are fit for purpose, checked, and reviewed for each transaction, and that the directors act in accordance with them.  If there is a concern that a sole director cannot form a quorum or resolve on a particular matter on their own then either a second director will need to be appointed or the articles of association will need to be amended (which may require a second director to be appointed for the quorum to call the shareholders meeting).  We have not examined the Duomatic principle or section 281(4) CA 2006 in relation to these cases although we will be pleased to discuss them with you.

If you would like some further information relating to this article or any other corporate or commercial legal matter…Talk to Tollers on 01604 258558 and out experienced team will be happy to assist.

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