In its decision in KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) the High Court has clarified the recent uncertainty surrounding whether sole directors are able to make decisions on behalf of a company, particularly where a company has adopted the Model Articles of Association.
The Background
The uncertainty surrounding the authority of sole directors stems from two seemingly contradictory articles in the Model Articles. Model Article 7(2) provides that if a company only has one director and no provision of the articles requires it to have more than one director then a director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making. Model Article 11(2) provides that the quorum for a directors’ meeting 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.
It had been widely interpreted by legal professionals that if a company had a sole director, the impact of Model Article 7(2) was that it disapplied Model Article 11(2) such that a sole director had authority to make decisions on behalf of the company. This view was challenged by a surprising ruling of the High Court in the case of Hashmi v Lorimer-Wing [2022] EWHC (Ch) where the Court found that Model Article 11(2) required there to be a minimum of two directors and that a sole director acting under the Model Articles could not make valid decisions. This called into question historic decisions that had been made by a sole director of a company which had adopted Model Articles as those decisions were potentially all void and meant that those companies were advised to amend their articles in order to make valid decisions going forwards. It also rendered the Model Articles incompatible for sole director companies in their unamended form.
Unsatisfactory progress
Following the ruling in Hashmi v Lorimer-Wing [2022], two further cases were decided which limited the scope of the original ruling of the High Court but created an unsatisfactory distinction. One the one hand companies who had adopted the Model Articles without modification and had only ever had a sole director from incorporation and on the other, companies who had adopted the Model Articles without modification and have a sole director but had previously had more than one director. In the former case, the sole director had authority to make valid decisions on behalf of the company but in the latter case, the sole director could not make any decisions other than to appoint additional directors.
Welcome clarification
The decision of the High Court in KRF Services required the court to consider again the validity of a sole director’s decision in relation to a company which had adopted the Model Articles in an unamended form and which had previously had more than one director. In this case, the court ruled that Model Article 7(2) prevailed over Model Article 11(2) so that a sole director did have authority to make decisions. Otherwise Model Article 7(2) would be rendered futile which clearly could not have been the intention. The judge distinguished the previous cases on account of them involving amended forms of the Model Articles or where the judges’ opinions had only been made as obiter and therefore not binding.
Key conclusions
Thankfully we now have a much clearer interpretation of the application of the Model Articles’ to sole director companies. The Model Articles, if adopted without any amendments, do not require a company to have more than one director. As such, provided the Model Articles have not been amended to include a requirement for a company to have more than one director, a sole director can take decisions on behalf of the company irrespective of how many directors the company may have had in the past.
While the dust seems to have settled, the cases highlight the importance of ensuring a company’s articles of association contain the appropriate provisions to reflect the actual governance of the company in practice. The risk of the articles being at odds with the practical realities are that decisions of the company could be deemed to be void and not binding. It is therefore advisable to review the constitutional documents of your company or a company you are a director of to ensure they are compatible with often changing governance structures.
If you need assistance reviewing your articles or amending them to ensure they align with your current governance practices, please don't hesitate to contact me or a member of our Corporate and Commercial team.