Rebecca Sewali, a solicitor in the Corporate and Commercial department discusses the ‘weight’ of the recent High Court case of Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch). Can companies with one director and model articles make valid decisions?
Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch) demonstrated the importance of ensuring that a company complies with their articles of association and raises interesting questions for any company with model articles and only one director.
The case concerned an unfair prejudice petition brought by a shareholder of the company in question under section 994 of the Companies Act 2006. The company served a defence and filed a counterclaim. However, when the company filed a counterclaim, the company was operating with one director. The shareholder made an application for the company’s counterclaim to be struck out on the basis that the company’s bespoke article 16 required a minimum of two directors for a board meeting to be quorate. The shareholder argued that the sole director had no power to direct the company to file the counterclaim.
The company had adopted bespoke articles which slightly amended the Model Articles for private companies limited by shares.
The dispute concerned the interpretation of Model Articles and bespoke articles and specifically on the relationship between the following provisions:
Articles 7(1) relates to the general rule about decision-making by directors. The directors must make decisions either a majority decision at a board meeting or by unanimous written resolution (decision taken in accordance with Model Article 8).
Article 7(2)(a) states that if 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. The director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
Article 11(2) provides that the quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.
In this case, bespoke article 16 modified Model Article 11(2) listed above to require two specific directors to be present to form a quorum, one of whom must be an Investors’ Director (if appointed) and one the Executive.
Article 11(3) states that 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
Bespoke article 16, as stated above, modified Model Article 11(2) and Model Article 7(2) was disapplied.
The High Court held that
The modified Model Article 11(2) required the company to have a minimum of two directors to be quorate. The court agreed with the unfair prejudice petition brought by a shareholder of the company and disagreed with the company’s argument that the Model Articles must allow a company to operate with a sole director because a company is permitted to have at least one director pursuant to the Companies Act 2006. The court held that the company had acted ultra vires in commencing a counterclaim in that action due to the company operating with a sole director at the time.
Implications
Generally, where a company has several directors and needs to hold a board meeting, Model Article 11(2) applies. Contrary to standard practice, this judgment appears to suggest that if a company intends to operate with a sole director, it would be prudent to consider bespoke articles which stipulate that the quorum is one director to avoid the risk of the company’s decisions being deemed ultra vires. That is the case even for companies currently using the Model Articles unmodified. As mentioned above, this was required in this High Court case.
In the interim, we suggest that companies review their articles to check whether they have adopted Model Articles 7 and 11 or bespoke articles. If a company has operated with one director, it should consider seeking advice on whether the decisions made by the sole director previously are void.
Lenders may require an amendment to the company’s articles particularly if a sole director has confirmed that they have authority to authorise entry into documents.
This judgment does appear strange to many in the field. It is possible that other disgruntled shareholders will try to use this point to argue that decisions of a sole director are ultra vires. We think it is likely that either, another case will come along to clarify this point or amendments to the Model Articles for private companies limited by shares may be proposed by the Government.
Published 20 April 2022
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News Author: Rebecca Sewali