The Case
KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) concerned an application for an administration order brought by Mr Thomas Paillardon who, following the introduction of the Russia Sanction Regulations, was the sole active director of KRF Services (UK) Ltd (Company).
The high court was to consider, amongst other things, whether the administration application could be validly brought by a sole director.
The Facts
The Company had unamended Model Articles which included the conflicting provisions in Model Articles 7(1), 7(2) and 11(2), summarised as follows:
- 7(1) - Any decision of the directors must be either a majority decision at a meeting or otherwise by unanimous decision.
- 7(2) - If the company only has one director and no provision of the articles requires it to have more than one director, Model Article 7(1) does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.
- 11(2) - The quorum for directors’ meetings must never be less than two, and will be two unless otherwise altered at a directors meeting.
The sole director of KRF Services (UK) Ltd had resolved to apply for the administration order. In considering whether the sole director could validly resolve to do this, the court considered the previous judgements in other cases, namely Re Fore Fitness Investments Holdings Ltd [2022] EWHC 191 (Ch) and Re Active Wear Ltd [2023] BCC 14.
The Caselaw
Re Fore Fitness concerned an unfair prejudice petition. The sole remaining director determined that the company should bring a counterclaim, but the petitioner argued that a sole director could not validly make such a decision as the company's amended Model Articles required a quorum of two directors for board meetings.
The Deputy Judge ruled that the sole director's decision was invalid because the amended requirement for a quorum of two directors implied that the company must have at least two directors, thus Article 7(2) did not override the specified quorum requirements.
In Re Active Wear, the court addressed the validity of an out-of-court appointment of administrators by a sole director. The company, which had only ever had a single director, Ms Rabate, had adopted Model Articles without any modifications.
The Deputy Judge held that a standard form resolution executed by Ms Rabate alone was valid and effective to appoint administrators. He clarified that when a company has only one director, as permitted under section 154(1) of the Companies Act 2006, and the articles do not require more than one director, Article 7(2) of the Model Articles prevails over the quorum requirement of at least two directors in Article 11(2).
The Judge additionally commented that if a company had previously had more than one director, Article 11(2) would again prevail over Article 7(2), as it was deemed the intention of the articles to require a minimum of two directors to constitute a quorum.
The Impact
These two rulings and the Judges obiter comments in RE Active Wear left a situation where sole directors could only make decisions in the event there had never been more than one director, and the Model Articles had been adopted without express or implied modification to the minimum number of directors. This determination was met with confusion due to its seemingly odd distinctions between a company’s constitution and the decision-making powers of sole directors.
The High Court in Re KRF Services has worked to clarify the position, concluding that Model Article 11(22) does not impose a minimum number of directors, and therefore in any case where a company has adopted unmodified Model Articles, Article 7(2) prevails and sole directors can make all decisions on behalf of the company.
Whilst the decision in Re KRF Services is good news for sole directors, helping to clarify the law in relation to the Model Articles under the Companies Act 2006, it remains advisable for companies to consider amending their articles to clearly allow a sole director to constitute a quorum whilst removing any contradictory provisions elsewhere. This not only removes ambiguity in relation to the company’s position on sole director decision making, but ensures operations aren’t hindered by unforeseen director absences.
If you would like advice in relation to anything discussed in this article, or need to update a company’s articles of association, please don’t hesitate to get in touch with a member of BPE’s Corporate Team.
