
The High Court has recently provided a much needed clarification on the ability of sole directors to make decisions on behalf of a company in accordance with the provisions of Model Articles.
Background
The case of KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) (“KRF Services”) involved a company with a sole director. Initially, the company adopted Model Articles and had multiple directors.However, following the imposition of financial sanctions, KRF Services (UK) Ltd found itself with only a single director.
In response to the financial sanctions, the sole director applied to the court to place KRF Services (UK) Ltd into administration. Although the application itself was not contentious, there was potential uncertainty regarding whether the sole director had the authority to make such a decision, given the company had adopted the Model Articles without any amendments. This issue arose due to certain provisions within the Model Articles which are summarised below:-
- Model Article 7(1): Directors are to make decisions either at a board meeting (governed by subsequent articles) or through a “unanimous decision of the eligible directors” (governed by Model Article 8). This is referred to as the “general rule.”
- Model Article 7(2): If a company has only one director and its articles do not require more than one, the general rule does not apply. In this case, the sole director may make decisions “without regard to any provisions of the articles relating to directors’ decision-making.”
- Model Article 11(2): The quorum for directors’ meetings can be determined by the directors, but it cannot be fewer than two, with the default quorum being two.
- Model Article 11(3): If the total number of directors falls below the quorum, the directors are prohibited from taking any decisions, except to appoint additional directors or call a general meeting for shareholders to appoint more directors.
There is a clear overlap t between Model Article 11(2), which mandates a minimum of two directors to form a quorum, and Model Article 7(2), which permits a sole director to make binding decisions.
Previous Rulings
This issue has arisen in previous cases, with the courts offering different interpretations of the Model Articles. For instance, In Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch) (“Fore Fitness), the High Court considered the position where the company had adopted Model Articles with amendments, including a bespoke Article 16 providing for a quorum of two directors. The Court determined that Article 16 was a provision requiring the company to have more than one director and Model Article 7(2) was disapplied. The judge observed that the company should have removed Model Article 11(2) if it intended to empower a sole director. This suggests that the judge considered that Article 11(2) was itself a provision requiring the company to have more than one director. In this case, in the judge’s view, the effect of Article 11(2) had been emphasised by the inclusion of bespoke Article 16.
In Active Wear Ltd [2022] EWHC 2340 (Ch) (“Active Wear”), the High Court addressed the same scenario but in a case where the company had adopted the unmodified Model Articles and had only ever one director since its incorporation. The Court found that, in this case, the provisions of Model Article 7(2) took precedence, allowing the sole director to make decisions independently.
The judge in Active Wear did not agree that Model Article 11(2) was of itself a provision requiring the company to have more than one director. He did suggest, however, that an express provision to the Model Articles stipulating a quorum of two (or more) directors could be interpreted as a provision requiring the company to have more than one director, if at any point the company had had more than one director. Accordingly, if the number of directors fell below the minimum required to form a quorum, Model Article 11(3) would apply. Model Article 11(3) would override Model Article 7(2) if the number of directors fell to one, and the remaining director would not be entitled to make any further decisions, save for the purposes of appointing additional directors. Model Article 7(2) could only be relied upon where a company had only ever had one director.
These prior rulings provide important context for the issue faced by KRF Services (UK) Ltd, as the company’s adoption of the unmodified Model Articles and its sole directorship raised the question of whether the director could act unilaterally under Model Article 7(2).
The Decision
The judge considered both rulings and agreed with the general analysis in Active Wear. The Court reached the conclusion that where a company has adopted Model Articles without modification, a sole director can take all decisions of the company and Model Article 11 (2) does not impose a stipulation regarding the minimum number of directors.
However, the judge did not agree with the suggestion in Active Wear, that a company could not rely on Model Article 7 (2) if it had had more than one director in the past (this was the case for KRF Services (UK) Ltd).
The judge held that conditions for Model Article 7 (2) to apply are:-
- the company only has one director; and
- there is no provision of the articles that requires the company to have more than one director.
On the facts, both conditions were satisfied in the KRF Services case.
Commentary
The decision in KRF Services is very welcome and has provided some clarity on the decision-making powers of a sole director. It supports an argument that where a company with a sole director has adopted Model Articles without amendments to the provisions on the number of directors or the quorum for board meetings:-
- no amendments are required to the articles to allow the sole director to manage the affairs of the company; and
- it is not relevant that the company has had more than one director in the past.
However, if a company’s articles include a bespoke provision for a minimum number of directors, which could include a provision for a quorum of two or more directors, the sole director is restricted in their decision making and can only take decisions to appoint further directors.
It should be noted that KRF Services was another High Court case so, although it is certainly helpful, the decision may not be followed in subsequent cases, particularly where there have been any amendments to the provisions in the Model Articles relating to the number of directors or quorum. Therefore, a ruling of a more senior Court endorsing the decision in KRF Services would provide more certainty on this issue.
If you have any questions surrounding this article, please do get in touch with myself, Manider Singh from our Corporate and Commercial team here.