The High Court has held that a company which had adopted the Model Articles without modification was able to operate and take decisions while it had only one director, in a decision that will hopefully now clarify this area of the law.

What happened?

In the matter of KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) concerned a company with a sole director.

The company had not always had a sole director. However, following the imposition of financial sanctions on the person identified by the relevant authority as the company’s ultimate beneficial owner, and the restrictions and association that ensured from that, it found itself with a single director and no persons willing to be appointed as additional directors.

Those same financial sanctions also severely impacted the company’s business to the point that, in May 2024, the company’s sole director applied to court to place the company into administration.

Although the application was not contentious, there was a concern, based on previous case law, that, as the company had adopted the Model Articles without amendment as its constitution, its sole director may not have had authority to make that application.

To understand this, it is necessary to recite four key provisions of the Model Articles, which we have paraphrased below.

• Model Article 7(1). Directors are to take decisions either in a board meeting (governed by subsequent articles in the Model Articles) or by a “unanimous decision of the eligible directors” (governed by Model Article 8). This is called the “general rule”.
• Model Article 7(2). If a company has only one director and its articles do not require it to have more than one, the general rule does not apply. Instead, the sole director can take decisions “without regard to any of the provisions of the articles relating to directors’ decision-making”.
• Model Article 11(2). The quorum for directors’ meetings can be fixed from time to time, but it cannot be less than two, and the default quorum is two.
• Model Article 11(3). If at any time the total number of directors is less than the quorum, the directors must not take any decision other than: (i) to appoint further directors; or (ii) to convene a general meeting to enable the shareholders to appoint further directors.

In 2022, in the case of Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch), the High Court had to consider the same issue in relation to a company that had adopted the Model Articles, but with some modifications. In particular, the company in that case had modified Model Article 11(2) to include a requirement for specific directors to be present to form a quorum.

As noted above, Model Article 7(2) disapplies the general rule only if a company’s articles do not require it to have more than one director. The court held that the quorum stipulation in Fore Fitness amounted to a requirement that the company have more than one director.

As a result, Model Article 7(2) did not apply and the sole director in that case did not have authority to take any decisions (in that case, to serve a counterclaim) other than to appoint more directors.

You can read more about the court’s decision in Fore Fitness in our previous Corporate Law Update.

Later in 2022, in the case of Active Wear Ltd [2022] EWHC 2340 (Ch), the High Court had to consider the issue again, but this time in relation to a company that had adopted the Model Articles without modification and which had only ever had one director.

The court in that case refused to find that a stipulation as to the quorum for a board meeting also set a minimum number of directors. It found that, if Model Article 11(2) had set a minimum number of directors, it would have rendered Model Article 7(2) redundant, as there would never be a situation in which a sole director could take decisions without regard to the general rule.

The judge in Active Wear found that the situation in that case was different from that in Fore Fitness, because the company in Active Wear had not modified the Model Articles and so had not introduced a requirement for a minimum number of directors.

You can read more about the court’s decision in Active Wear in our previous Corporate Law Update.

The decision in Active Wear was welcomed at the time, as it aligned much more closely with the approach generally taken by practitioners up to that point.

However, the decision in Active Wear did not fully resolve the situation. This is because the judge in that case suggested that, even if a company has adopted the Model Articles without modification, if (at any point) it has more than one director and, subsequently, the number of directors falls to one, Model Article 11(3) does set a minimum number and the sole director cannot take decisions other than to appoint further directors.

This therefore created a rather awkward three-way distinction between:

• a company that has adopted the Model Articles but modified them to include (expressly or by implication) a minimum number of directors;
• a company that has adopted the Model Articles without modification and has always had a sole director from incorporation; and
• a company that has adopted the Model Articles without modification and has a sole director, but has previously had more than one director.

In the second case, the sole director could take decisions of any kind. In the first and third cases, the sole director could only take steps to appoint more directors. In particular, the distinction between the second and third cases was felt to be particularly unexpected.

What did the court say this time?

This time, the High Court appears to have fully resolved the issue.

The judge agreed with the basic premise that, where a company has adopted the Model Articles but modified them to require a minimum number of directors, then a sole director cannot exercise all powers of the company under Model Article 7(2). This is what had happened in Fore Fitness, and the judge approved that decision.

The court also agreed that the Model Articles need to be internally consistent and that Model Article 7(2) needs to have some effect. However, it noted that the judge’s comments in Active Wear about companies that had previously had more than one director were obiter (i.e. not critical to the decision). As a result, they did not form any kind of binding authority.

The court concluded that, where a company has adopted the Model Articles without modification, a sole director can take all decisions of the company, and Model Article 11(2) does not impose a minimum number of directors, however many directors the company may have had at any time in the past. In effect, the obiter comments in Active Wear were not correct.

What does this mean for me?

This is a most useful decision which will be welcomed.

Although the decision in Active Wear went some way towards quelling the concerns generated by the decision in Fore Fitness, it did not entirely clear the air.

The decision in this case creates a position that is straightforward to understand and accords with the wording of the Model Articles.

• If a company’s articles include a requirement for a minimum number of directors, the only thing a sole director can do is take actions to appoint further directors.
• The Model Articles do not themselves contain a requirement for a minimum number of directors.
• As a result, where a company has adopted the Model Articles without amendment, or with amendments that do not introduce a minimum director requirement, a sole director can take any decisions on behalf of the company.

As we previously noted, companies and their advisers should still tread carefully. Fore Fitness was, in substance, a decision on an application to strike out a claim, Active Wear appears to have been decided without legal representation or full argument, and this case (KRF) was not contentious.

As a result, despite the judge in each case employing very well-articulated reasoning, all three judgments are less persuasive than they might otherwise have been.

However, it does feel as though we have reached a good landing point on this issue. In any event, the key practical points for shareholders and directors of companies remain similar.

• Persons looking to establish a new company should ensure that the company’s articles are drafted properly. If the intention is that the company should be able to operate with only one director, the articles could make this crystal clear.
• Established companies should review their articles of association, particularly if they have adopted Model Articles 7 and 11 in unmodified or modified form. If such a company needs to be able to function with a sole director, it will need to ensure its articles make this clear or, at the very least, do not contain any provisions that could be seen as setting a minimum number of directors.

Where a company has historically operated with only one director, it may wish to consider obtaining advice on whether any historic decisions taken by the sole director are or may be void.

Access the High Court's decision in Re KRF Services on decisions taken by a sole director