Does it really take two to tango: can a sole director of a company with unmodified Model Articles make decisions on behalf of the company?

The High Court has provided welcome clarity in Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch), confirming that a sole director can validly make decisions on behalf of a company that has adopted the Model Articles without modification, even if the company previously had multiple directors.

Factual Background

KRF Services (UK) Ltd (“KRF”) provided management services for the benefit of Dr Kantor, a Russian businessman, and his family. Dr Kantor was sanctioned under the Russia (Sanctions) (EU Exit) Regulations 2019 and Council Regulation (EU) No. 269/2014 in April 2022. KRF was not expressly sanctioned, but the practical result was that it was prevented from carrying on its business while Dr Kantor was sanctioned unless and until licences were granted by the Office of Financial Sanctions Implementation.

Prior to the imposition of the sanctions, KRF had three directors. Two of them resigned thereafter, and the remaining sole director said that it was impossible to find replacements due to the sanctions.

The sole director signed a board resolution determining, inter alia, that KRF would apply for an administration order and issued that application jointly with KRF in May 2024.

One of the questions for the Court to decide was whether the administration application was validly brought. Could the sole director pass such a resolution when all of the other directors had resigned and no-one else was willing to join the board?

Legal Background

Section 154(1) of the Companies Act 2006 requires a private company to have at least one director. In other words, a private company can have a single director.  A company is of course free to add bespoke provisions to its articles requiring it to have more than one.

There has been a tension between Articles 7 and 11 of the Model Articles regarding the number of directors required to make decisions on behalf of a company. Article 7 of the Model Articles provides that:

7.—(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 11 provides that:

11.—(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.

On the one hand, Article 7 enables sole directors to make decisions alone. On the other, Article 11 prohibits sole directors from making decisions other than appointing further directors or calling a meeting to do so as there is not a quorum of at least two directors.

In Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch), the company’s articles were a mix of the Model Articles and bespoke articles, one of which provided that the quorum for board meetings was two directors. The judge held that a decision made by the sole director was not valid because the requirement in the articles that there be two directors for a meeting to be quorate was a requirement that the company have at least two directors. Article 7(2), therefore, did not apply

In Re Active Wear Ltd [2023] BCC 14, the company had adopted the Model Articles without modification. The judge held that a resolution by the sole director was valid. He said that where section 154(1) of the Companies Act 2006 permits a company to have one director and if there is no provision in the articles requiring it to have more than one, Article 7(2) prevails over Article 11(2). The judge distinguished Re Fore Fitness on the basis that the bespoke article regarding the quorum was interpreted as a requirement for the company to have at least two directors, meaning that Article 7(2) did not apply.

However, the “wrinkle” with regard to the decision in Re Active Wear as far as KRF was concerned was that the judge went on to say that there was a tension between Articles 7(2) and 11(3). He said that Article 7(2) would apply where a company has never had more than one director. If a company has had more than one director in the past (as was the case for KRF), Article 11(3) would apply.

Decision

Departing from Re Active Wear, the judge in Re KRF Services held that there was no tension between Articles 7(2) and 11(3) as suggested. He held that for Article 7(2) to apply, the conditions are that (i) the company “only has” (present tense) one director, and (ii) that "no provision of the articles requires it to have" more than one. KRF met the first condition. It was irrelevant how many directors it had in the past. Applying Re Active Wear, the judge also found that Article 11 of the Model Articles does not require that a company have more than one director. KRF also met the second condition, not having any bespoke articles requiring more than one director. Accordingly, the sole director of KRF could "take decisions without regard to any of the provisions of the articles relating to directors' decision-making", which includes all of Article 11. The resolution passed by KRF’s sole director to issue the administration application was, therefore, valid.          

Comment

Nuanced questions concerning the number of directors or shareholders that are needed to take decisions or form quorate meetings have been around since (at least) the 1876 case of Sharp v Dawes, and it is perhaps surprising that any ambiguity still persists in these matters in modern English company law. Nevertheless, the decision in Re KRF Services does settle this particular question – and in a way that most likely best reflects practical reality and provides a solution for many companies that may have found themselves in the position KRF found itself in.

However, it is also a reminder to shareholders and directors that, where possible, articles of association should be adopted that, or amended to, provide both the flexibility and the safeguards required by the company in its particular commercial context.

further information

If you have any questions, please contact Sophie Evans in our Dispute Resolution team. 

 

about the author

Sophie is a Senior Associate in the Dispute Resolution Team. Her experience covers a broad range of commercial disputes, with a particular focus on shareholder and director disputes, civil fraud and breaches of contract.