Re Active Wear Ltd (in administration) – the decision of sole directors.

Introduction

In this case, the High Court considered the validity of a sole director’s out-of-court appointment of administrators. The Court ruled that the appointment of administrators, based on the decision of a sole director of a company with unmodified model articles, was valid. This was a divergence from the High Court previous ruling in Re Fore Fitness Investment Holdings Ltd [2022] (“Fore Fitness”), where it had been held a sole director was not properly authorised to make a valid decision on behalf of the company.

Background

Active Wear Ltd (“Active Wear”) was incorporated in June 2015 and showed warning signs of insolvency in March 2022. In April 2022, the sole director sought to appoint joint administrators of Active Wear.

Facts of the case

In assessing the principal issue of whether the sole director was entitled make a valid decision to appoint administrators, the Court considered the construction of Active Wear’s Articles of Association. The entirety of Part 2 of Schedule 1 of the Model Articles was of relevance to the Court for this application, as it pertained to directors’ powers and responsibilities and decision making by directors.

The following key provisions of the Model Articles were of particular importance to the Court:

• Article 7(1): outlines the general rule that decisions made by directors must be that of a majority decision, or a decision in accordance with article 8 which requires a unanimous decision.
• Article 7(2): Article 7(1) does not apply where the company has only one director. Consequently, the sole directors’ decisions are not required to regard any subsequent provisions of the Model Articles relating to decision making.
• Article 11(2): states that the quorum for directors’ meeting may be fixed, but if not, the default is fixed to two.
• Article 11(3): restrictions apply to the directors’ decision making where the total number of directors is less than the required quorum. Directors can only decide to appoint further directors or hold a shareholder meeting to appoint further directors.

Decision

The Court held that the sole director’s decision to appoint administrators was valid because as the Model Articles were unmodified. Article 7(2) applied and that meant Article 11(2) and Article 11(3) were disapplied.

In its decision, the Court recognised the contradiction between this ruling and that in Fore Fitness. However, the Court did emphasise the following key factual differences:

• Active Wear has only ever had the same sole director, whereas Fore Fitness had one director at incorporation and a different, interim director before commencement of proceedings.
• Active Wear’s articles were unmodified, but Fore Fitness’ articles were bespoke, albeit based on the Model Articles. In particular, Fore Fitness had a specific bespoke article that required multiple directors for decisions at board meetings to be valid, therefore disapplying Model Article 7(2).

Conclusion

This decision reduces the uncertainties prompted by the ruling in Fore Fitness and will be welcomed by sole directors of companies with unmodified Model Articles as it clarifies their decision-making powers. The Court’s decision in Fore Fitness turned on the fact that there was a modified article specifically disapplying Model Article 7(2).

In practice, this case highlights the importance of carefully reviewing and understanding the articles of a company in determining whether decisions are valid. This applies not only to decision making surrounding an insolvency event, but to wider company decisions as well.

Should you wish to discuss any of the issues raised in this article, please contact Sacha Pickering.