Earlier this year the High Court passed a controversial judgment in Hashmi v Lorimer-Wing  EWHC 191 (Ch) (colloquially known as Re Fore Fitness Investments Holdings Limited) which has rekindled an ongoing debate on the fitness for purpose of the model articles. Specifically, this case has drawn focus on the breadth of the decision-making power exercisable by sole directors operating under the model articles and the appropriate steps moving forward.
The specifics of the matter highlighted a tension between model articles 7(2) and 11(2). Article 7(2) provides that:
“…if the company only has 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 director’s decision-making.”
Whereas article 11(2) states:
“[the quorum for directors’ meetings]…may be fixed from time to time…but it must never be less than two, and unless otherwise fixed…is two.”
Prior to this judgment the industry collectively considered article 11(2) to be irrelevant in instances of sole directorship, believing it to relate to the quorum requirement for company meetings first and foremost (rather than imposing a required minimum number of directors on the company generally). This approach has, since the model articles were first drafted, allowed sole directors to rely on article 7(2) to take decisions and operate their businesses alone.
However, in its judgment the High Court concluded that this wasn’t the case. It held that a provision (in this case a bespoke one) which required at least two directors to constitute a valid quorum was also “logically…a requirement that the company in question have two directors in order to manage its affairs”. The Deputy Judge went further (by way of obiter) to opine that 11(2) imposed a requirement that the company have two directors and suggested an amendment was required to the model articles in order for a sole director to run a company. Specifically, that 11(2) “should be deleted”.
The logical proceeding questions for everyone is therefore (i) what valid decisions can a sole director who operates under the model articles make, (ii) what of the decisions they have made to date, and (iii) just how fit for purpose are the model articles for sole director companies?
In the first instance it is worth noting that the comments regarding articles 11(2) and 7(2) are obiter not ratio and so are not binding. This case has however highlighted an area where the decision powers making for sole directors, something which goes to the heart of a director’s purpose/power, can be questioned. There is an unavoidable irony that sole director companies, exactly the sort of company for whom the 'hassle free' model articles were envisaged, may not now be able to benefit from them without amendment. It would be a sensible practical step moving forwards (for the reasons set out above and others) for any sole director operating under the model articles to amend their constitution to remove any ambiguity as to their decision-making powers.
This judgment has also created an opportunity for sole director decisions made under the model articles to be challenged as being prima facie ultra vires, not just moving forwards, but retrospectively too. Though it may be a ‘belt and braces’ approach, it may also be prudent for sole director companies to ratify any past decisions (where possible) by way of shareholder resolution - this would be a particularly attractive option if these circumstances are discovered as part of a due diligence exercise forming part of a M&A transaction.