Are companies with model articles of association allowed to operate with a sole director?

Following some contradictory case law on the subject, the High Court in KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) (“KRF”) has now seemingly resolved the longstanding question as to whether standard model articles of association for private companies limited by shares (“Model Articles”) are sufficient for companies operating with a sole director. The case focused on whether a sole director may alone, under the Model Articles, resolve to file an administration application, even if the company had previously been governed by more than one director.

On the facts of the case, sanctions were imposed on the company’s beneficial owner, which disrupted the business to the point where the other directors resigned, and replacements could not be found. Ruling that the sole director could ultimately lodge the application in this instance, the High Court confirmed that Model Article 7(2) serves to disapply all directors' decision-making provisions in Model Article 11, whether the company previously had more than one director or not. Model Article 7(2) states that a sole director can make decisions without adhering to the usual provisions for director decision-making in Model Article 11, whereas Model Article 11(2) requires a minimum of two directors to form a quorum. There is therefore clearly a tension between these two provisions and such conflict has not gone unnoticed.

Previous High Court rulings, Hashmi v Lorimer-Wing and Fore Fitness Investment Holdings Limited [2022] EWHC 191 (Ch) (“Fore Fitness”) and Re Active Wear Limited [2022] EWHC 2340 (Ch) (“Active Wear”), offered two conflicting views as to whether a sole director may take decisions under the Model Articles, albeit in slightly different circumstances. In Fore Fitness, the High Court looked at the position where Model Articles with bespoke amendments (in particular, imposing a minimum number of directors to be quorate) had been adopted, and the company had been incorporated with more than one director. In contrast, Active Wear involved a company with unamended Model Articles that had been incorporated with a sole director.

In Fore Fitness, the High Court held that the sole director lacked the requisite power under the company's articles to commence a counterclaim in relation to an unfair prejudice claim under section 994 of the Companies Act 2006, given that the amendments to the articles clearly stated that the company was required to have more than one director to take decisions. By contrast, the High Court in Active Wear held that if a company adopted the unmodified Model Articles and had always had a single director, that director could make all decisions independently, including appointing an administrator for the company. The judge in Active Wear found that the situation was different from Fore Fitness, because the company in Active Wear had not modified its Model Articles and had not introduced a requirement for a minimum number of directors. However, while the Active Wear decision was welcomed as it aligned more closely with the approach generally taken by practitioners up to that point, unfortunately it did not fully resolve the situation. The judgment raised a concern for companies that had previously operated with more than one director, with the High Court suggesting that in such cases, the Model Articles might still require a minimum number of directors if the number of directors fell to one. Therefore, the decision in Active Wear could only really be relied on where the company had always had a single director.

However, despite previously having more than one director, the High Court in KRF nonetheless upheld the reasoning in Active Wear, clarifying that when a company adopts Model Articles without modification, and its articles do not require more than one director, a sole director can make decisions without regard to the quorum requirement in Model Article 11 even if it formerly had multiple directors. The Court emphasised that the conditions for Model Article 7(2) to apply are that (i) the company "only has" one director; and (ii) "no provision of the articles requires it to have" more than one director. Therefore it is irrelevant whether there were several directors prior to the resolution being passed and the judge’s comments in Active Wear were simply obiter and not binding.

The judgment in KRF helps resolve the uncertainty that had lingered after Active Wear and Fore Fitness, and best follows the literal interpretation of the Model Articles. The case also provides the following practical implications and takeaways going forward:

• For new companies: Prior to incorporation, the articles which the company plans to adopt should be carefully considered to confirm that they clearly allow for companies with sole directors to operate effectively with one director if intended.
• For existing companies: The current articles of association should be reviewed to ensure they do not inadvertently impose a minimum director requirement, in case there is ever a period where there is only one director. If they do, the articles can be amended as required or additional directors can be appointed to resolve any potential issues.
• For sole directors: Any historic decisions made by a sole director should be reviewed to confirm their validity and if needed, those decisions can be ratified accordingly.

There is no doubt that the decision in KRF offers some much-needed clarity in a controversial area of law. However, it would be helpful for the Court of Appeal to confirm this interpretation, given that all three cases are High Court decisions and considered to carry the same weight. In the meantime, KRF goes a long way in temporarily providing clear and practical guidance for sole directors and companies alike.