This article is for those who own a private limited company in the UK with one director only, and for the directors of such business entities. The aim here is to explain what the law says about decision-making by sole directors, what has changed recently, and what solutions can be implemented to adapt to the new rules.
Indeed, the law changed unexpectedly in 2022 leaving those running private companies with confusion. A well-established consensus allowing sole directors to make valid decisions even when the decision should be made by the Board is now partially overruled.
Section 154 (1) of the Companies Act 2006 is rather self-explanatory when it says that (quote) „A private company must have at least one director”. It can be easily inferred that a private company can have a single director if the rule indicates that it must be at least one (otherwise, it would say that it must be at least two, three, etc, but it does not). As such, the statute gives us the right to appoint a sole director in a private company, and this right did not change in 2022.
The question is rather whether this sole director can make any decisions within the company if Board approval is required. In fact, some of the decisions should or even have to be made by the Board (as a majority decision) rather than by a single director.
If the private company limited by shares adopted Model Articles of Association (as many did by default), Article 11(2) in these Model Articles reads as follows (quote):
„The quorum for board meetings may be fixed from time to time by a decision of the directors but cannot be less than two and unless otherwise fixed, will be two directors by default”.
Therefore, we need at least two directors to constitute the quorum for Board. Without a quorum no decision will be made, meaning that without at least two directors no decision by the Board will be made. To be precise, no decision other than a decision to appoint more directors. Indeed, Article 11(3) of the Model Articles reads (quote):
“If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision— (a) to appoint further directors, or (b) to call a general meeting so as to enable the shareholders to appoint further directors.”
The situation would seem to be hopeless for sole directors, but for Article 7(2) of the Model Articles (quote): “If— (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”
We can see now that these two Articles, namely Article 7(2) and Article 11(2) of the Model Articles are somehow contradictory. In short, the first one says that if there is only one director in the company, this single director can take decisions (including decisions reserved to the Board), and disregard provisions relating to decision-making by directors. In turn, the second one still requires at least two directors to constitute the quorum on the Board.
The way in which the law was construed up until now was that Article 7(2) of the Model Articles takes precedence over Article 11(2) of the same Model Articles as it understandably applies to a more specific situation in which the company has only one director. Therefore, Article 11(2) was treated more as a general rule with the exception expressed in Article 7(2).
This is exactly why the sole director in a private company could make all the decisions. Until it changed in 2022.
The two cases from 2022 that should be considered when addressing the change are:
In Fore Fitness Investments, the company had the Articles of Association based on the Model Articles with some slight bespoke amendments.
In short, the company made a counterclaim that subsequently sought to be struck out by its shareholder. He argued that the counterclaim followed the decision made by the Board held by a sole director. The Articles of Association of the company, as the shareholder claimed, required at least two directors to hold the Board (amended Article 16). Therefore, in his view, the decision to make a counterclaim by the Board was invalid because the sole director lacked the requisite power to hold such meetings and make a decision on his own. The judge found in the shareholder’s favour.
It means that even though the company was run by a sole director, he could not make a valid decision for the reason that for a Board meeting a quorum is required, and the quorum is at least two directors.
Therefore, the unwritten rule that Article 7(2) of the Model Articles of Association (“sole director can make all the decisions”) takes precedence over Article 11(2) of the Model Articles of Association (“the need for a quorum”) seemed to be now overruled. In fact, Article 11(2), thus the need for a quorum, is now above Article 7(2) allowing single directors to make the decisions.
The High Court considered Article 7(2) of the Model Articles of Association and found that it only allows a single director to make decisions provided there are no other provisions in the Articles of Association that specify the quorum at more than one director. Further, it found that Article 11(2) of the same Articles includes a requirement for the company to have more than one director for the Board to take place. It concluded that having regard to the above, the company needed more than one director for the Board.
The question can be raised, what with all the decisions made by the sole directors so far? Are they valid? The solution here may be a retrospective member approval by virtue of the written shareholders’ resolution.
In Active Wear, the company had Model Articles of Association. Also, it was run by a sole director from outset. These two facts make this case significantly different from the circumstances in Fore Fitness Investments. In Active Wear, the sole director appointed an administrator whilst, at the same time, the minutes taken at the meeting of the Board when the appointment was made, mentioned a quorum that allegedly was met. In this case, the decision made by a sole director was considered valid by the High Court.
In this case, Article 7(2) of the Model Articles of Association took precedence over Article 11(2). The judge found that in the circumstances where Articles of Association do not include other provisions requiring more than one director, a sole director can make a decision. It was further said that Article 7 of the Model Articles of Association had an “unambiguous effect” on the sole directors of private companies who are allowed to run the companies on their own.
Does it mean, therefore, that single directors in companies governed by Model Articles can act as usual, and nothing changed for them as a result? Not necessarily.
The two cases mentioned hereinabove are by High Court and neither can be considered to be more relevant or take precedence over the other case. In fact, the articles that were taken into consideration in Fore Fitness Investments, even though from the partially amended Articles of Association, are Article 7(2) and Article 11(2) derived from the Model Articles of Association. The comments the judge made seemed to be regarding the bespoke Articles as well as the Model Articles. On the other hand, in Active Wear, Fore Fitness Investments was explicitly distinguished.
It can be said, that Active Wear provided some well-needed clarity to address the dilemma, at least for those who adopted Model Articles of Association. Their interest seemed to be protected by the conclusion reached in Active Wear, although comments pertaining to Model Articles 7(2) and 11(2) by the judge in Fore Fitness Investments cannot be simply disregarded.
The questions raise when we think about past decisions of sole directors, in particular, made where the bespoke Articles applied. We strongly encourage everyone owning the company to check its Articles of Association, and it may appear that immediate amendments are required to maintain continuous and seamless operations.
Those affected by the change can consider the following examples of solutions that could be implemented:
If you have any questions or need any further assistance, please contact one of the lawyers in our business team on 0330 107 0106 or email business@imd.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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