Clarification on the authority of sole directors operating under the Model Articles of Association

The recent case of Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) has gone some way to clarify the authority of sole directors operating under the Model Articles of Association prescribed by the Companies Act 2006.

The key issue is a tension between Model Article 7(2), which allows sole directors to act alone, and Model Article 11(2), which requires a quorum of two directors for board decisions. This inconsistency has led to legal disputes over the validity of decisions made by sole directors under unamended Model Articles.

Re KRF Services builds on earlier case law, including Fore Fitness Investments Holdings Ltd v NBTY Europe Ltd [2017] EWHC 3378 (Ch) and Re Active Wear Limited [2022] EWHC 2340 (Ch), offering further judicial interpretation on how these provisions should be applied in practice.

Background: case law to date

The conflict in the Model Articles

The main issue with the Model Articles in relation to sole director decision-making arises from a conflict between Article 7, which allows sole directors to act, and Article 11, which appears to require a quorum of at least two directors for board decisions.

i. Model Article 7 – authority of a sole director

Model Article 7(2) states: “If the company only has one director, and no provision of the articles requires it to have more than one director, the general rule about decision-making by directors does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.”

This provision seems to provide a clear mechanism for a sole director to make decisions unilaterally, without requiring a board meeting or additional directors. The wording suggests that as long as there is no express requirement in the articles for multiple directors, the sole director has full decision-making authority.

ii. Model Article 11 – quorum

Model Article 11(2) states: “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.”

Model Article 11(3) states: “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.”

These provisions appear to set a minimum requirement of two directors for board decisions to be valid. While Model Article 7(2) allows sole directors to act, Model Article 11 does not explicitly waive the quorum requirement in such circumstances.

As a result, there is a tension between these two provisions:

• If Article 7(2) is read broadly, a sole director may act unilaterally regardless of other provisions
• If Article 11(2) is read strictly, board meetings require a minimum of two directors, meaning a sole director may lack authority to make decisions.

This inconsistency raises significant practical concerns for companies with a sole director structure, as it creates uncertainty over whether this single director can continue to act validly.

These issues have been examined in case law, with courts adopting different approaches depending on the specific wording of the company’s articles and the factual background of each case.

Re Fore Fitness

In Fore Fitness, the company had amended the Model Articles to include a bespoke provision requiring specific directors to be present to form a quorum of two directors for board meetings. When the company was left with a sole director, that director attempted to make decisions unilaterally, which were later challenged.

The court held that the sole director lacked authority to bind the company because the quorum requirement took precedence. This is on the basis that the bespoke article was a provision requiring the company to have more than one director and therefore Model Article 7(2), by its own terms, was disapplied.

The court further found that Model Article 11(3) deals with what should happen if the company does not have sufficient directors to represent a quorum, and that Model Article 11(2) would need to be deleted in order for a single director to run a company.

Re Active Wear Limited

In Re Active Wear, the company had adopted unamended Model Articles and only ever had a sole director appointed. The key issue was whether the sole director could appoint administrators.

The court noted that Model Article 7(2) provides that, where there is a sole director and there is no provision requiring it to have more than one director, the general rule about decision making does not apply. It found that the provisions of the articles relating to directors’ decision making were clearly those contained in the heading “Decision-making by directors” which includes Model Article 11(2) would therefore not apply.

However, the court 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 that Model Article 11(3) would apply in that situation.

This resulted in an unsatisfactory position where it seemed the Model Articles would only allow a sole director to act in circumstances where the company had only ever had one director. Where the company previously had multiple directors, it seemed the quorum requirement in Model Articles 11(2) would still apply, and that a sole director could only act in accordance with Model Article 11(3) to appoint an additional director or call a meeting of shareholders.

Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch)

KRF Services (UK) Ltd was a company that provided management services to the family of a person who was designated under the Russia (Sanctions) (EU Exit) Regulations 2019 (“Sanctions Regulations”). As a result, KRF’s business operations were severely restricted and so the company faced financial difficulties and applied for an administration order under Paragraph 12 of Schedule B1 of the Insolvency Act 1986.

KRP had adopted unmodified Model Articles and, as a result of the Sanctions Regulations causing the other directors to resign, was left with a sole director who passed a resolution to make an application for administration.

One issue for consideration by the court was whether the resolution passed by the board amounts to a valid decision.

The court considered the previous case law, finding that Fore Fitness could be distinguished as it applies to cases where the company had specifically modified the provisions relating to the minimum number of directors, and agreed with the decision in Re Active Wear that Model Article 11(2) should not be read in such a way as to mean Model Article 7(2) can never take effect.

However, the court did disagree with the suggestion that a company could not rely on Model Article 7(2) if it had more than one director in the past, noting such comments were said in passing. The court found this was irrelevant, noting that the requirement for Model Article 7(2) is that the company “only has” one director – speaking in the present tense.

What does this mean for businesses?

KRF Services supports the view that a sole director of a company with unamended Model Articles may take any decision relating to the conduct of the affairs of the company regardless of how many directors the company has previously had. However, it should be noted that all three of the decisions referred to above are High Court decisions, and so are not binding on a future court. Therefore, without a Court of Appeal decision on the point, there is a risk that a future court could disagree with the interpretation.

There also remains uncertainty as to the position where a company has bespoke articles or has amended the Model Articles. It would therefore be prudent for companies in such a position to ensure the articles are properly amended to specifically allow a sole director to act, with the appropriate revisions made to the provisions on quorum, or to appoint a second director.