Sole Director Decisions

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

The High Court decision in Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) has further clarified the legal framework governing sole directors where a company has adopted the model articles of association for private companies limited by shares without modification (Model Articles). This case centred on insolvency proceedings for a sanctioned entity and is an essential reference point for businesses relying on sole director governance structures. The court’s analysis touched on critical corporate governance issues, particularly the powers and limitations of a sole director under the unamended Model Articles.

Sole Directors and the Model Articles

Under the Model Articles, provisions regarding directors’ authority can be interpreted in ways that create uncertainty for companies with a sole director. Specifically:

• Model Article 7(2) provides that decisions requiring the board’s approval can only be taken if a quorum is present.
• Model Article 11(2) stipulates that the quorum for directors’ meetings is two unless otherwise specified (which can be in the company’s articles of association).

In Re KRF Services, the court examined whether these provisions within the Model Articles prevented a sole director from acting when no other directors were appointed. Building on previous precedent cases such as Re Active Wear Ltd [2022] the court confirmed:

1. Sole Directors Can Act: where a company’s articles of association (whether they be the Model Articles or bespoke articles of association) do not explicitly restrict sole director decision-making, a sole director can operate effectively, particularly where the company’s structure has evolved to have only one director.
2. Pragmatic Interpretation: the court favoured a practical approach, recognising that interpreting the articles of association to invalidate sole director actions would render the company inoperative—a result contrary to the intention of corporate governance rules.
3. Previous Board Composition: the court considered that the fact that the company has previously had more than one director was irrelevant in determining whether a sole director can act where the company falls from having a higher number of directors to one as long as there are no provisions of the articles requiring the company to have more than one director.

This decision emphasises that unless expressly restricted, sole directors retain authority to manage the company’s affairs, including filing for administration.

Practical Implications for Businesses

1. Amend the Company’s Articles to Reduce Ambiguity: companies should review their Articles of Association to clarify provisions on sole directors, ensuring continuity of governance regardless of board composition changes.
2. Legal Advice in Transitions: when reducing the board to a sole director, seeking legal advice can prevent governance disputes or administrative delays.
3. Document Decisions: sole directors should meticulously document decisions to strengthen their position if challenged.

Conclusion

This ruling affirms the legal validity of sole director governance within the framework of the Model Articles, provided there are no explicit restrictions. For companies relying on such structures, this case highlights the importance of clarity in company governance documents and adherence to procedural norms.

For further assistance in corporate governance or reviewing your Articles of Association, contact our Corporate Team.