High Court gives guidance on interpreting single director company model articles

In contrast with its judgment in the Re Fore Fitness Investments Holdings Ltd case in February, the High Court has now ruled that the appointment of administrators by a company with a sole director and model articles was valid.

• Model articles should be interpreted using the same principles as any other written contract.
• Model article 11(2) does not need to be disapplied before a single-director company is able to function.
• Whether or not a company has adopted bespoke articles on quorum requirements will be crucial.
• Re Active Wear [2022] EWCH 2340 (Ch)

The model articles: the law

The model articles of association, which are set out in the 2006 Companies Act, are the standard default articles available for use by UK companies. To understand both decisions, it is useful to briefly set out the relevant provisions of the model articles:

• model article 7(1) sets out what is known as the “general rule”, being that any decision of the directors must be either a majority decision at a meeting or a unanimous decision;
• model article 7(2) states that if a company only has one director, and no provision of its articles requires it to have more than one director, the above “general rule” does not apply, and the single director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making; and
• model article 11(2) says that the quorum for directors’ meetings is two, unless otherwise fixed by the directors.

When a company has model articles (whether or not amended), model articles 7(2) and 11(2) are often used together without any issues. The widely accepted consensus until the Fore Fitness decision had been that model article 11(2) only applies when a company has more than one director (because in that case, since there are several directors, board meetings are used as part of the decision-making process and therefore under model article 11(2) the quorum is at least 2 directors), and that model article 7(2) applies when a company has a sole director (in which case board meetings are not needed therefore any quorum requirements do not apply). In that way, each model article is used in different circumstances without any conflict since each is deemed to apply at different times. For example, if a company has three directors, then model article 11(2) would apply, but if two of those directors resign and the company is left with a sole director, then model article 7(2) would come into force and model article 11(2) would no longer apply. At least this was the thinking until the Fore Fitness decision earlier this year.

The Fore Fitness decision

The Fore Fitness decision took the legal profession by surprise. The court effectively went radically against the accepted consensus on the interpretation of model articles, and said that model article 7(2) only applied where “no provision of the articles requires the company to have more than one director”, which we already knew; but also that model article 11(2) did create a requirement to have more than one director – because it required at least two directors for meetings to be quorate. The judge in Fore Fitness disagreed with the proposition that only one of model article 7(2) or model article 11(2) applied at any given time depending on how many directors the company had at that point, and said instead that these model articles applied together at all times. As a result, single directors of companies with model articles did not have the power to take any decisions at all unless model article 11(2) was disapplied.

Following that decision, it became worryingly clear that the actions of sole directors could be successfully challenged if a company has model articles – something which was highlighted in the Fore Fitness case itself since it was ultimately held that the sole director did not have the authority to take actions on behalf of the company. Given the vast number of sole director companies with model articles in the UK, the decision created significant uncertainty. The decision also appeared to be contrary to section 154(1) of the 2006 Companies Act, which permits private companies to have a single director; as well as the guidance issued by parliament, which states that the model articles do not provide for a minimum number of directors.

The Active Wear decision

In the Active Wear case, the court had to consider the same issue in the context of the appointment of administrators by a sole director. Here, however, the judge referred back to a 2017 decision - Cosmetics Warriors Ltd & Anor v Gerrie - which had established that the articles of a company are a statutory contract between that company’s members and between each member and the company. As a result, the correct way to interpret the model articles was to use the ordinary principles that would apply to the interpretation of any written contract, which included “focussing on the meaning of the relevant words in their documentary, factual and commercial context”.

Because of the way the model articles are clearly laid out in sections and sub-sections, the judge explained that the effect of model article 7(2) was to disapply all of the remaining provisions in the “decision-making by directors” section of the model articles when a company has a sole director – including the problematic model article 11(2). In essence, instead of model article 11(2) disapplying model article 7(2) as ruled in the Fore Fitness case, the judge said that model article 7(2) disapplied model article 11(2) when a company had a single director, very much in accordance with the way model articles had been widely interpreted before that decision. As a result, Active Wear’s sole director did have authority to act, and the administrators’ appointment was valid.

Contradictory judgments?

Fore Fitness had adopted amended model articles containing a bespoke article requiring two different types of directors to be present before the quorum requirements were met. In addition, another article said that in any conflict between model articles and bespoke articles, the bespoke articles would prevail. By contrast, Active Wear had adopted the model articles in their entirety without any amendments, and this is the rationale which the judge in the Active Wear case used to explain the discrepancy between each judgment.

Regardless, what remains unclear is that the judge in the Fore Fitness case did not say that the company needed to have two directors in the specific facts of that case, because of its bespoke articles. He in fact said that the model articles, as drafted, simply did not work for companies with a sole director and that model article 11(2) should expressly be disapplied for such companies. It is easy to see how this could be construed as a comment on the interpretation of model articles generally rather than the articles of Fore Fitness specifically.

Nevertheless, the judge in the Active Wear case said that it would be wrong to read the unamended model articles so that model article 11(2) effectively ruled out the operation of model article 7(2), because to do so would mean that model article 7(2) would no longer have any practical use. As the articles of association of a company had to be read as a whole, it could not have been the intention that they should have to be amended before article 7(2) could operate in the case of companies with a single director.

However, the judge also said that where articles expressly require several directors for quorum purposes and the company initially has sufficient directors to meet that quorum, but eventually becomes a single-director company – as was the case with Fore Fitness – then article 11(3) should apply instead of article 7(2) and the only decision which the sole director will be able to make is to appoint additional directors so the quorum provisions are met. In the words of the judge in the Active Wear case, it is therefore likely that article 7(2) will apply “only where there has never been a greater number of directors than one”, as had been the case in Active Wear.

Going forward

As each case was heard in the High Court, each judgment is binding in its own right and has the same authority. The judge in the Active Wear case emphasised that the presence of bespoke articles amending quorum provisions would be a key determining factor in the interpretation of model articles, and although it is evident from the above that some uncertainty remains, the decision brings about a welcome departure from the more controversial Fore Fitness decision. This should provide some comfort to anyone affected by the actions of companies with sole directors.

Written by restructuring expert Sara Segura of Pinsent Masons.