Decision Making & Sole Directors

Many sole director private companies will adopt the model articles with minor adaptations, such as disallowing the chairman’s casting vote in model article 13. Other sole director companies may adopt entirely bespoke articles. It has, however, always been assumed that the legal provisions that relate to the running and decision making of companies extend to sole director companies and specifically that article 7(2) of the model articles suspends the normal rules governing company board procedure where the company only has one director.

Under article 7(2), if a company only has one director, and no provision of the articles requires it to have more than one director, the general rule on director decision making is disapplied so that the sole director may take decisions without regard to any of the provisions of the articles relating to directors’ decision making.

The 2022 High Court case of Hashmi v Lorimer-Wing has cast some doubt over this and whether a director of a private limited company can pass board resolutions while being the only director of the company. There is some concern that following this case, for companies with unamended private company model articles, two or more directors may be required to constitute a quorum to hold a board meeting and that the model articles without amendment may no longer be suitable for private companies with a sole director. This is in response to the judge suggesting that article 11 of the model articles (requiring the quorum for directors’ meetings to be never less than two), take precedence over article 7(2).

In addition, as a result of this ruling, any decisions taken by the sole director of a private company with unamended model articles, may be prima facie ultra vires, i.e. open to challenge and capable of being over turned.

However, after Hashmi, the High Court in Re Active Wear Limited [2022] EWHC 2340 (Ch) has subsequently suggested that the model articles for private companies are suitable for companies with a sole director appointed, in contrast to Hashmi. The Deputy Judge hearing this case held that the sole director of this company was able to make decisions on their own and, accordingly, a decision to appoint administrators was valid notwithstanding the earlier High Court decision in Hashmi. The judge here took the view that article 11 is specifically disapplied by article 7(2) where there is a sole director and no other provision requiring more than one director. The judge also stated that Hashmi was distinguished on its facts.

Both Re Active Wear and Hashmi are High Court judgments. As such Re Active Wear cannot overrule Hashmi but sits alongside it as neither can be said to take precedence over the other. Where does this leave sole directors considering the implications of these two cases? Unfortunately, without further legal clarification it is impossible to say with complete certainty which is the correct approach. Given these competing authorities, sole directors should exercise caution, review their articles of association and consider whether previous acts require ratification and/or whether the appointment of additional directors or modification to the model articles is required. This may be particularly relevant where a company historically had more than one director.

It is recommended to seek independent legal advice before making any changes to a company's constitution.