Businesses with a single or ‘sole’ director have been left in a state of confusion after contradictory decisions from the High Court.
The decisions leave thousands of sole director small businesses across the UK vulnerable to having contracts contested, loan applications denied and decisions left open to challenges if they do not fully adopt the ‘Model Articles’ in full.
The Model Articles are the default set of rules that directors must follow when running their companies. They, or a slightly modified version, are used by the vast majority of companies that are incorporated in the UK. Companies can adopt their own articles, however, the ‘Model Articles’ were specifically drafted as a set of basic rules that would be suitable for use by small businesses.
In the case of Fore Fitness last year, the High Court ruled that companies acting under the Model Articles cannot have a sole director, however, in the more recent case of Active Wear the court upheld a sole director’s decision. The difference between the two companies is that the first used a modified version of the Model Articles whereas the second had adopted the Model Articles in their entirety.
Since the Model Articles were introduced in 2008, the generally accepted principle has always been that the article about sole directors supersedes the need for two if a company only has one director, however, the High Court’s decision in the case of Fore Fitness threw this presumption into doubt.
Businesses with a single director that have modified their Model Articles should have these reviewed immediately.
Lisa Botterill, corporate partner at law firm, Shakespeare Martineau, said: “Whilst this may seem like a technical point, it has significant business and cost implications. We have already seen small companies with sole directors being required to change their articles before banks will lend to them and this has left business actions carried out by sole directors open to challenge.
“Businesses with sole directors and anything other than just the Model Articles must act quickly to amend their company’s articles to ensure their decisions are protected.
“Whilst appointing a second director is another option, the role has many legal standards that need to be complied with and so is not a decision to be taken lightly. Amending a company’s articles will generally be the quicker and smoother process.
“The Model Articles have never been entirely fit for purpose. Many companies have adopted a slightly amended version and this is where the risk lies, which must now be revisited in light of the decision of the High Court. Not doing so could result in huge repercussions and leave them in a vulnerable position.”