Re Active Wear – A reversal on sole director ability to appoint administrators?
In the recent case of Re Active Wear Limited (in administration), the High Court ruled that the purported out-of-court administration appointment by a sole director of a company with unmodified model articles, was valid notwithstanding the earlier High Court decision in Re Fore Fitness Investments Holdings Ltd  EWHC 191 (Ch). We have set out below to what extent this new case law clarifies the parameters within which a sole director can place a company into administration.
By way of brief reminder, Fore Fitness related to an unfair prejudice claim under s.994 of the Companies Act 2006 (“CA 2006”). Upon incorporation, the company only had one director, however at least one other director was subsequently appointed, although by the time of the proceedings, there was again only one director. The High Court held that notwithstanding the inclusion of Model Article 7(2), at least two directors were required for a valid decision to be made. The judge also found that if there is a single director, the Model Articles need to be modified in order to enable the company to have a sole director. The decision in Fore Fitness was at odds with market practice and interpretation of the CA 2006 and the Model Articles, and it had previously been assumed that where a company had a sole director, Model Articles 11(2) and 11(3) were not applicable.
Active Wear can be factually distinguished from Fore Fitness in two principal ways:
Active Wear, from the date of its incorporation, only ever had a sole director. In contrast, Fore Fitness had a sole director when it was incorporated and had at least one additional director who was appointed in the interim.
Active Wear operated under the Model Articles of Association prescribed for private companies limited by shares under Schedule 1 of the Companies (Model Articles) Regulations 2008 (“Model Articles”). Crucially, in the case of Active Wear, the Model Articles were not amended or adapted in any way at the time of the company’s incorporation, or subsequently. In contrast, Fore Fitness operated under a set of articles of association which were a mixture of the Model Articles and bespoke articles. Of particular note was that one of the bespoke articles which Fore Fitness adopted stated that the quorum for board meetings was two directors.
The key provisions of the Model Articles which are relevant for the purposes of the Active Wear case are as follows:
Article 7(1): This sets out the general rule that decisions of the company’s directors must either be a majority decision at a meeting or a decision made in accordance with article 8 (article 8 provides for unanimous decision of eligible directors).
Article 7(2): Where a company only has one director and the company’s articles do not otherwise require it to have more than one director, the general rule above (namely Article 7(1)) does not apply, and instead, the sole director may take decisions “without regard to any of the provisions of the articles relating to directors’ decision-making.”.
Article 11(2): The quorum for board meetings may be fixed from time to time by a decision of the directors, but it cannot be less than two, and unless otherwise fixed, the default quorum is two directors.
Article 11(3): Where the total number of directors is less than the quorum required, the directors are restricted from taking any decision other than a decision to appoint further directors, or to call a general meeting to enable the shareholders to appoint further directors.
Can a sole director appoint an administrator where the company has adopted unmodified Model Articles?
In circumstances where the company has always had a sole director of a company operating under unmodified Model Articles, Active Wear provides some comfort (or at least a decent argument) that an administrator appointed by a sole director will be validly appointed – which is consistent with market understanding about the operation of the Model Articles prior to Fore Fitness.
Judge Martin KC took the view that where the unmodified Model Articles are in place, they ought to be read as a whole, and Article 7(2) would effectively be stripped of any practical meaning if Article 11(2) and (3) are to preside in the foregoing scenario, and it could not have been the legislature’s intention that the Model Articles would require amendment before Article 7(2) is able to operate (see para 17 of the Active Wear judgment).
That said, caution is still required, because Active Wear and Fore Fitness are both High Court decisions carrying equal precedential weight, with differing views about the interaction of Model Articles 7 and 11.
What is the position in relation to a sole director of a company which has adopted unmodified Model Articles but has also had multiple directors in the past?
Where a company has adopted the unmodified Model Articles but has previously had more than one director, the position is much less clear cut. It is possible that Article 7(2) only trumps Article 11(2) if there has only ever been a sole director (see para 18 of the Active Wear judgment). Therefore, in such cases, continuing to err on the side of caution and either expressly disapplying the quorum requirements in Article 11(2) or appointing additional director(s) to meet the quorum requirements is still sensible .
From a practical standpoint, this does create an additional burden of checking through the company’s records to see whether there were other directors who were previously appointed in addition to adding another step into the process when time is often of the essence when appointing an administrator.
Can a sole director appoint an administrator where the company has adopted Model Articles and bespoke articles?
1. What is the position where the bespoke articles set a quorum requirement?
Where a company has adopted a mixture of the Model Articles and bespoke articles (or indeed, fully bespoke articles of association), the provisions must be reviewed carefully as a whole in order to check quorum and other requirements are properly met in order for the decision to be effectively passed. Note that there is even a school of thought that sole directors cannot have a “meeting” with themselves and should ordinarily record their decisions as written resolutions (and again, the articles must be reviewed carefully to check for restrictions). Where the quorum has purposefully been set to more than one director (as was the case in Fore Fitness), or there are other articles which require the appointment of multiple directors, then the inclusion of Model Article 7(2) is unlikely to empower a sole director to put the company into administration – in other words, the sole director will only have the power to appoint further directors or call a shareholders meeting, and any other decision may be deemed ultra vires.
2. What is the position where the bespoke articles do not set a quorum requirement?
Where a company has adopted bespoke articles which do not set a quorum requirement, or otherwise require the appointment of multiple directors for any reason. The position post Active Wear appears to be: (i) where there has only ever been a sole director of the company, it is likely that the appointment can be validly made by the sole director if Model Article 7(2) is included in the Company’s articles – although practitioners may still wish to take a cautious approach, or (ii) if there has historically been multiple directors, it may be prudent to proceed cautiously, as additional directors may need to be appointed in order to validly make the decision to put the company into administration.
As things stand, although Active Wear goes some way to clarifying the powers of a sole director to place a company into administration, there remain ambiguities in certain circumstances and as we have noted above it is advisable to proceed carefully in such cases. Active Wear may not, be the last decision we see that considers whether an administrator has been validly appointed following a decision of a sole director.