Sole director decision making: welcome clarification for companies which have not always had only one director

In a decision released a week or so ago – KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) – the High Court held that the making of an administration order in respect of a company which was potentially subject to the sanctions regime did not in principle breach the relevant sanctions regulations. This decision also looked at the authority of the company’s last remaining director to pass the resolution to make the administration application, and it is this aspect of the decision that we focus on here. 

TLDR: The judge concluded that a company (KRF) which had adopted the Model Articles without modification was able to take decisions while it had only one director (despite having had more than one director in the past).

The KRF case concerned a company with a sole director. KRF had not always had a sole director but eventually found itself in this situation after the imposition of sanctions against the ultimate beneficial owner of the company. The sanctions in turn severely impacted KRF’s business, and its other directors resigned and could not be replaced. In May 2024 KRF’s remaining sole director applied, in both KRF’s name and in his own as director, to court to place the company into administration.

The application was not controversial, but there was a concern, based on two 2022 cases (Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch) and Active Wear Ltd [2022] EWHC 2340 (Ch) – see our previous posts here and here) that the sole director may not have had authority to make the application because the company had adopted the Model Articles without modification and had previously had more than one director. The judge decided that the resolution passed by the sole director was a valid and effective decision of the company to apply for an administration order. In doing so he considered the decisions in the Fore Fitness and Active Wear cases, concluding that:

1. Fore Fitness applies only where there is an article which states that the quorum of directors is two (or more) and therefore does not apply if there is no such quorum requirement
2. Active Wear was correctly decided insofar as where there is no such quorum requirement, the effect of Model Article 7(2) is to enable the sole director to take decisions alone
3. the Active Wear judge’s comments that #2 above apply if a company has only ever had a sole director were obiter (i.e. not essential to that judge’s decision) and therefore not binding on him. He determined it was irrelevant that KRF had more than one director in the past (the condition in Model Article 7(2) is expressed in the present tense, to the effect that the company “only has” one director)

The judgments in each of Fore Fitness, Active Wear and KRF are decisions of the High Court and therefore of equal weight: whilst the judge in KRF can (and did) distinguish the earlier decisions, it would be helpful for sole director decision making to be considered by the Court of Appeal. But in the meantime, KRF is a helpful decision for directors, shareholders and legal practitioners when looking at sole director decision making because it is clear and its conclusions align to the wording of, and intention behind, the Model Articles. In summary:

• 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 (although a company can have bespoke articles stipulating a minimum if it wants)
• as a result, where a company has adopted the Model Articles without amendment, a sole director can take decisions on behalf of the company, regardless of whether it previously had more than one director

The practical takeaway points for directors, shareholders and legal practitioners from these three cases (and especially KRF) are:

• new company incorporations: ensure that the company’s articles are drafted properly, including making it clear that the company can operate with only one director at any time where appropriate
• existing companies:
  • consider if the articles enable the company to operate with a sole director and/or contain provisions that could be interpreted as setting a minimum number of directors
  • whether a company has had more than one director in the past should be irrelevant to the analysis of whether a sole director can take valid decisions
• historic decisions taken by a sole director: consider whether any of these decisions are or may be void, ratifying such decisions where applicable.