Re KRF Services (UK) Ltd – can sole directors act in accordance with the Model Articles?

The High Court has once again considered the ability of sole directors to make decisions on behalf of a company in accordance with the provisions of the model articles for private companies limited by shares (the Model Articles), following the earlier cases of Fore Fitness and Active Wear.

Re KRF Services (UK) Ltd [2024] EWHC 2978 (KRF Services) focused on whether an order should be allowed for the appointment of administrators for an insolvent company, KRF Services (UK) Ltd (the Company), which found itself in financial difficulties following its ultimate beneficial owner being placed under financial sanctions pursuant to Russian sanctions legislation.

One of the six issues arising from this case was whether the Company validly brought the administration application made by the Company’s sole director on its behalf. The Company had previously had multiple directors but at the relevant time only had a sole director. The Company had adopted the Model Articles in full without modification.

The judge considered recent key case law before arriving at his decision. From his analysis he concluded that the resolution to apply for an administration order, passed by the sole director, was a valid decision of the Company under the Model Articles.

Background

The two relevant provisions of the Model Articles considered in the case are as follows:

• Article 7, which provides for decisions to be taken collectively but makes an exception for where there is a single director:

“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, which standing alone would prohibit a single director from making any other decisions apart from the exceptions in Article 11(3):

“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.”

Previous case law

Questions over the interaction between these provisions of the Model Articles were raised in the High Court in Re Fore Fitness Investments Holdings Ltd, Hashmi v Lorimer-Wing [2022] EWHC 191 (Fore Fitness). In that case, a company had adopted bespoke articles of association which applied as its baseline articles the Model Articles. The Model Articles were then disapplied to the extent they conflicted with the bespoke articles. In addition to Model Articles 7(2) and 11(2), the articles also contained a bespoke article which required a quorum for a board meeting to be two directors. The judge said a provision such as this requiring there to be at least two directors to constitute a quorum logically was a requirement that the company in question have two directors in order to manage its affairs, therefore Model Article 7(2) was disapplied. However, departing from the view of many practitioners and commentators, the judge also said that an amendment to the Model Articles would be required to delete Model Article 11(2) to give a single director the power to take decisions on behalf of a company.

The case of Re Active Wear Ltd [2022] EWHC 2340 (Active Wear) was a continuation of the same debate in the High Court. Unlike in Fore Fitness, the articles of Active Wear Limited were unamended Model Articles and the company had never had more than one director. The judge came to a different conclusion to the one arrived at in Fore Fitness – that Model Article 7(2) prevails over Model Article 11(2) when a company has only one director and when there was no provision of the articles requiring it to have more than one director, as was the case under the unamended Model Articles. However, although it was not necessary for him to decide the case, the judge went on to comment that Model Article 7(2) would not apply in a situation where the company has in the past had more than one director, and in that situation Model Article 11(3) would apply.

The case

The judgments in both Fore Fitness and Active Wear were considered by the judge in KRF Services. The judge agreed with the analysis in Active Wear that Model Article 11(2) should not be read as a requirement for the company to have more than one director whereby Model Article 7(2) could never take effect. Where a company has unamended Model Articles, as the company in question had in this case and in Active Wear, the sole director has authority to act under Model Article 7(2).

Where the judge in KRF Services differed in his analysis was in respect of the comments in Active Wear suggesting that a company could not rely on Model Article 7(2) if it had in the past had more than one director (which was the case for the Company). The judge said that the fact the Company had more than one director in the past was irrelevant. The judge reasoned that the conditions for Model Article 7(2) to apply are first that the company “only has” one director (in the present tense) and second that “no provision of the articles requires it to have” more than one director, and both conditions were satisfied in this case.

Comment

This decision adds weight to an argument that:

• where a sole director company has adopted the Model Articles without amendments to the provisions on numbers of directors or quorum for board meetings, no amendments are required to the articles to allow the sole director to run the company; and
• the fact that a company with a sole director has in the past had more than one director is not relevant to this point.

It is worth noting that each of Fore Fitness, Active Wear and KRF Services is a High Court decision. The High Court is not bound by its previous decisions, but the modern practice is that a High Court judge should follow the judgment of another judge unless they are convinced it is wrong. Therefore whilst the KRF Services decision is helpful, a Court of Appeal decision confirming the point would clear up any residual concern in relation to this.

There is also still a lack of clarity in relation to companies that have not adopted a fully unamended version of the Model Articles, and it would be interesting to see if the court deals differently with a company with a composition of articles different to that of the companies dealt with in Fore Fitness, Active Wear and KRF Services.

Where a company has bespoke articles or has adopted an amended form of the Model Articles and the amendments impact the requirement for a certain number of directors and/ or the quorum requirements for board meetings, companies with sole directors will need to take appropriate action to ensure that any ambiguity as to the authority and powers of the sole director under the articles is removed. This can be achieved either by:

• amending the articles (by way of a shareholder’s resolution) to disapply any term that requires more than one director; or
• appointing a second director.

Lenders entering into finance documents with borrower companies with sole directors (including loan agreements, security documents and intercreditor agreements) will want such companies’ articles to be reviewed and amended to address this point where relevant, to ensure that the company can validly resolve to enter into those documents.