How many directors must a company have? Implications of the cases of Re Fore Fitness and Re Active Wear

This sounds like a simple enough question for any lawyer, especially a specialist corporate practitioner.  You would expect the answer to be straightforward, with little scope for that frustrating habit of lawyers to start their advice with the words “on the one hand” followed swiftly by “but on the other hand”.

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The answer is of course is another familiar one – “it depends”.  What’s more, what it depends on could be determined by relatively arbitrary circumstances.

The answer, based on current caselaw is the following – a private limited company can have a single director unless either:

• the Articles of Association require more than one director OR
• the company has adopted the Model Articles and has had multiple directors

A company cannot have a single director however if the company has adopted the Model Articles and has ever had more than one director.

Does this make logical legal sense?

• on the one hand if the company was incorporated with, and has only ever had, one director, that single director can continue to act alone
• on the other hand, if the company has ever had a second director at any time (either from incorporation or by the subsequent appointment of one or more additional directors) but is later reduced to a single director, that individual cannot act legally.  A second director must be appointed.  Alternatively, the Articles of Association will need to be amended to allow the single director to do so.

A private limited company can operate with a single director if it has never had more than one director. However, if the company has ever had multiple directors, it cannot legally function with only one director unless the Articles of Association are amended accordingly

How did we get to this point?

For a period of time, the position was more restrictive.  Following the High Court decision in Re Fore Fitness Investments Holdings Ltd [2022]¹ the situation was that a single director of a company with unamended Model Articles could not act, even if the company had never had more than one director.Fortunately, a subsequent High Court decision in Re Active Wear Ltd [2022]² clarified that the prohibition on a single director acting alone only applied if the company had ever had a second director. Even so, this later decision leaves many companies likely to be operating with a single remaining director and whose actions could be subject to future challenge or doubt.

The legal Framework

First to consider is the Companies Act 20063, which provides that a private company must have at least one director.  Also, whilst corporate directors are allowed, at least one director must be an individual (a natural person)⁴. 

Next are the relevant provisions of the Model Articles and the section headed “DECISION-MAKING BY DIRECTORS”:

Article 7, headed, “Directors to take decisions collectively,” provides:

1. The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.
2. If –

(a) 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, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 8, headed, “Unanimous decisions,” provides for decisions to be made when all eligible directors indicate to each other by any means that they share a common view on a matter.

Article 11, headed, “Quorum for directors’ meetings,” provides:

1. At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.
2. 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.
3. 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.

Though there was some debate about the issue (recognising an inherent contradiction between Article 7(2) and Article 11(3)), the prevailing opinion in the legal profession was that, prior to the decisions in the cases discussed in this article, Article 7(2) overrode Articles 11(2) and 11(3) for a company with a single director.However, the decision of ReFore Fitness overturned the widely accepted professional view, causing no small degree of concern for lawyers and their clients.

Article 7(2) allows a sole director to make decisions if the company has only ever had one director. Article 11(3) requires at least two directors to form a quorum for decisions if the company ever had more than one director. This creates confusion about whether a sole director can act alone if the company previously had more than one director.

Re Fore Fitness

The case involved an unfair prejudice petition brought under section 994 Companies Act 2006 by one shareholder against the other shareholder and the company itself.  The company counterclaimed against the petitioner for damages, including for breach of director’s duties and breach of contract.  The company’s Articles of Association, as a consequence of a previous investment round, were a combination of the Model Articles and bespoke Articles.  Model Articles 7 and 11 were included, together with a bespoke Article 16 which, modifying Article 11(2) of the Model Articles, provided that “The quorum for meetings of the Board shall be two Directors.”

The company had previously had three directors but, at the time of the filing of the counterclaim, had only one director (the co-respondent to the unfair prejudice petition).  The petitioner sought to strike out the counterclaim.  The petitioner’s argument was that the interpretation of bespoke Article 16 was to require two directors.  As the company only had one director, the co-respondent had no power to direct the company to file the counterclaim and, as an ultra vires act⁵, it should be struck out.

The judge found in favour of the petitioner and that Article 16 required the company to have two directors.  By its own terms (the words “no provision of the articles requires it to have more than one director”), Model Article 7(2)(b) had been disapplied by bespoke Article 16.  

The judge further commented that

amendment is required for the Model Articles to permit for a single director to run a company [and] such amendment would need to include the deletion of Model Article 11(2)

In this case, the parties had not deleted Model Article 11(2) instead, they reinforced it in the form of bespoke Article 16.

The serious implication of this judgment was that, for any company which had adopted the Model Articles without amendment and had only ever had one director, there was a risk that the director’s decisions could be held invalid in the future. 

The case led to a flurry of legal activity including:

• legal articles and commentary recommending that companies with a sole director amend their Articles of Association, to allow the sole director to act with the required authority
• banks requiring amendments to Articles of Association so that companies with a sole director were able to enter into loan and security agreements
• investment and M&A transactions including due diligence enquiries and warranties (or even indemnities) concerning the single director status of the target company and the validity of the director’s decisions
• companies passing shareholder resolutions to ratify previous decisions of sole directors

Fortunately, the case of Re Active Wear rowed back the position to a degree, though not to the point of the general consensus view before Re Fore Fitness.

Re Active Wear

This later case involved an application by the administrators of a company regarding their appointment by its sole director.  The company had only ever had one director and had adopted the Model Articles without amendment.  The sole director executed the documents presented to her to appoint the administrators, including board minutes of a meeting of the directors of the company (though in reality no meeting actually took place).

This later case involved an application by the administrators of a company regarding their appointment by its sole director.  The company had only ever had one director and had adopted the Model Articles without amendment.  The sole director executed the documents presented to her to appoint the administrators, including board minutes of a meeting of the directors of the company (though in reality no meeting actually took place).

The judge considered that

it was plain that, under the terms of the unamended Model Articles, a sole director may take on his or her own any decision relating to the conduct of the affairs of the company..[this] is the unambiguous effect of Article 7. ..Since the provisions relating to quorum set out in Article 11 are themselves contained in the section headed, “Decision-making by directors,” they are specifically disapplied by Article 7(2) in circumstances where there is only one director and there is no other provision requiring more than one director, as in the case of the Model Articles there is not.

The judge commented further (referring specifically to Re Fore Fitness)

The Articles must be read as a whole, and it cannot have been the intention that they [the Model Articles] would need to be amended (as the deputy judge seems to suggest at the end of paragraph 23 of his judgment) before Article 7(2) could operate at all.

He found that the appointment of the administrators was valid.

So far so good

This reconfirmed the general industry consensus that Article 7(2) overrides the quorum provisions set out in Article 11.  The judge however also made further comments in relation to the decision in Re Fore Fitness.  His view was that the factor dictating the result in the earlier case was the existence of the bespoke Article 16, which (as interpreted by the judge in that case) required there to be at least two directors in order for a valid decision to be made.  However, in discussing the rationale in Re Fore Fitness, the judge in Re Active Wear stated that, in a situation where the number of directors falls to one from a higher number, Article 11(3) applies and that Article 7(2) applies “only where there has never been a greater number of directors than one”.

As a result of the judgment in Re Active Wear, the position for companies with unamended Model Articles as their Articles of Association is (and remains) the following:

• if the company has only ever had one director, then that director can act alone
• on the contrary, if the company has had more than one directors at any point but becomes a sole-director company, that sole director is unable to act alone

In conclusion, revisit model articles of association and consider a change

For so long as a company has ever only had (and will only ever have) one director, no action need be taken, though it would be prudent perhaps to change the Articles of Association to future-proof the company should circumstances change,

However, any company with two directors remains well-advised to review and, if necessary, change its Articles of Association to allow a sole director to form a quorum should the number of directors fall from two to one and to clarify that the minimum number of directors is one.

Good news....we can help!
Our Articles of Association: Wholly-Owned Company, contain the necessary amendments to the Model Articles to remove the uncertainty caused by the Re Fore Fitness and Re Active Wear cases. 

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1. [2022] EWHC 191 (Ch) ↩︎
2. [2022] EWHC 2340 (Ch) ↩︎
3. section 154(1) Companies Act 2006 ↩︎
4. section 155(1) Companies Act 2006 ↩︎
5. an ultra vires act (Latin for “beyond the powers”) is an act taken by a company that is beyond the scope of the company’s power as defined in its Articles of Association ↩︎