Two separate cases disputed whether the decision of a sole Director of a company could be upheld. The case of Fore Fitness Investment Holdings Ltd and Active Wear Limited dealt opposing judgements and shed light on how the Company Model of Articles can be interpreted in different ways.

Fore Fitness (Hashmi v Lorimer-Wing)

Under section 994 of the Companies Act 2006, a Shareholder filed an unfair prejudice claim against Fore Fitness Investments Holdings Ltd. The Company responded with a counterclaim against this Shareholder. The case took an unexpected turn when questions were raised about the validity of the counterclaim as the decision to issue it was made by a sole Director, where the traditional Model Articles required a quorum (minimum) of two.

A judge decided the counterclaim was an ultra virus, because it was issued by a sole Director, which is against the Company’s Article.

The Model Articles

As is the case with nearly all companies, Fore Fitness’s Company constitution was based on the Model Articles, some with specific modifications. The four Model Articles pertinent to this case are as follows:

1. Model Article 7(1) – A Director(s) can only take decisions via a board meeting, written resolution or when all Directors of a company unanimously agree on it. This is the general rule that applies to all companies.
2. Model Article 7(2) – If a Company has only one Director and if the Articles don’t require the Company to have multiple Directors, the general rule does not apply. Basically, a solitary Director can make decisions as long as the Company’s constitution doesn’t require there to be the presence of multiple Directors.
3. Model Article 11(2) – The quorum, which stipulates the minimum amount of Directors required to be present at a meeting, has to be two, but the Company can change this to as many as they want. Fore Fitness modifies this particular Article and stipulates the presence of specific Directors at a meeting before making a Company decision.
4. Model Article 11(3) – If a Company is unable to get the quorum for a meeting, the remaining Directors are not allowed to make a decision. Instead, they have to appoint further Directors or enable the Shareholders to appoint the Directors.

The Model Articles Contradict

As you can see, these Model Articles contradict, specifically, 11(2) and 11(3) with 7(2). The latter seemingly allows a single Director to make a decision, whilst the former stipulates a quorum and forbids a decision without the quorum, whilst advising how the quorum can be established.

Additionally, the 11(2) did not stipulate a numerical quorum. Instead, it stated that “specific” Directors were required to be present.

The traditional understanding of 11(2) and 11(3) is that they form part of the general rule. This means they only apply if the Company has multiple Directors. If the Company only has one Director, 7(2) takes effect.

In Hashmi v Lorimer-Wing, the Shareholder says this type of understanding is incorrect and that as 11(2) stipulates the need for at least two Directors, the counterclaim can be dismissed because the decision was made by one Director.

The court upheld the Shareholder’s logic on this occasion. As 11(2) state the presence of two Directors, the counterclaim becomes null and void.

The Company rebutted, citing Section 154 of the Companies Act, which allows a Company to have a single Director that the 11(2) cannot abrogate. The judge acknowledged this but says that for this to be legally binding, the Model Articles must be modified to allow a sole director to run the Company and that the Company cannot use an unmodified form of the Model Articles if it has only one Director i.e. 11(2), and 11(3) need to be modified to remove the proviso of multiple Directors for 7(2) to take precedence over it.

Active Wear Limited

In the case of Active Wear Limited, the decision of a sole Director to appoint an out-of-court administration for the Company was under question. In this case, the judge allowed the decision of the sole Director to stand despite having unmodified Model Articles.

Why was this? And what was different this time around?

The judge for this case approached the interpretation of the Articles in the same way one would interpret a written contract. Given the Articles are organised into parts and sections, the judge explained that since 11(2) and 11(3) are found in the identifiable Part, they become null and void by 7(2) if there is only one Company Director provided no other proviso in addition to 11(2) and 11(3) exists stipulating the need for multiple Directors.

The judge explained how giving 11(2) and 11(3) precedence over 7(2) makes the latter an almost meaningless Article.

If a Company that currently has one Director were to appoint further Directors, then only do enacting 11(2) and 11(3) make sense. However, if the Company only has one Director to begin with (or at any point in its history), the 7(2) comes into effect.

In summary, the decision of a single Director when the company has multiple Directors would be incorrect. But if there are no other Directors, logic necessitates and accepts the decision of a single Director.

A Welcome Judgement

The logic applied in the Active Wear case is a welcome judgement. If the decision of all Companies with sole Directors were based on Hashmi v Lorimer-Wing’s logic, it could potentially open a can of worms and all decisions of a sole Director company to be contested and made null and void.

We hope the logic applied in the Active Wear case takes precedence over the approach taken with Hashmi v Lorimer-Wing. However, to avoid getting into a messy situation, it is recommended a Company modify its Model Articles to allow a sole Director to make a decision and not rely on the default Articles.