Sole Director Companies ' Be Careful As You Go It Alone

• Published date: 28 November 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers
• Law Firm: Weightmans
• Author: Sumaira Choudary

Private companies with sole directors find themselves in a state of uncertainty regarding the authority of their sole director to manage effectively.

Judgments in 2022 have called into question whether a sole director of a private company can effectively act if the company in question has adopted the Model Articles (whether in whole or in part).

The High Court judgments in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) (also known as Re Fore Fitness Investment Holdings Ltd) and Re Active Wear [2022] EWHC 2340 (Ch) have presented the need for clarity on this point and, pending such further clarification, companies would be well advised to check their articles of association for the provisions referred to in this article and seek advice on how to address the issues raised.

Background

The Companies Act 2006 ("Act") allows for private companies to have a single director.

A company incorporated under the Act is required to have a set of articles of association (being the document which sets out the basic management and administrative structure of the company). Companies may choose to either adopt their own form of articles of association (which may or may not include certain provisions of the Model Articles) or the relevant set of Model Articles prescribed pursuant to sections 19 of the Act and the provisions of the Companies (Model Articles Regulations) 2008 (SI 2008/3229). The Model Articles are essentially the default position for companies that do not (for whatever reason) adopt their own version.

Incorporating a private company is reasonably quick and easy to do via Companies House online service. Many people, not knowing otherwise, simply select to incorporate with the relevant Model Articles without paying much attention to whether the Model Articles reflect the desired management structure. This is usually the default approach: why should an entrepreneur and a director of an owner-managed business do otherwise?

It is important to be aware that those who incorporate with the Model Articles can look to change them at a later stage, by the adoption of specific articles, which may often be undertaken as part of a larger corporate exercise.

Developments

The company whose articles of association were under consideration by the court in Hashmi v Lorimer-Wing had a combination of the Model Articles and tailored provisions, including a bespoke quorum requirement of two directors, whereas the company in Re Active Wear had adopted the Model Articles without...