The High Court has provided much-needed clarity on this aspect of the law with its ruling in KRF Services (UK) Ltd [2024] EWHC 2978 (Ch). Companies that have adopted the Model Articles without modification could still operate and make decisions with only one director.
Background: The Sole Director and Model Articles
KRF Services (UK) Ltd is a limited company operating with a sole director, a common setup for smaller, privately owned businesses. The company adopted the Model Articles of Association, which are a default set of rules provided by the Companies Act 2006 and used by companies as an alternative to adopting customised Articles. The Model Articles are designed to be a “one-size-fits-all” framework for corporate governance. The Model Articles do not themselves require a minimum number of directors. However, they may not always address the specific needs or challenges faced by certain companies, especially those with unusual structures or sole Directors.
The Model Articles typically set out how decisions are made within the company, the directors’ roles and powers, and the shareholders’ rights. However, they may not cover every eventuality, and problems can arise if the provisions are not tailored to the company’s specific circumstances.
The Core Matter at the Centre of the Case
The central issue in KRF Services (UK) Ltd concerned the validity of certain decisions made by the company’s sole director under the Model Articles. The director had made several decisions without convening meetings, relying solely on written resolutions. In companies with more than one director, a formal meeting would typically be required to pass decisions, but in the case of a sole director, the question arises whether this process can be bypassed.
The case highlighted a potential gap in the Model Articles: although the Model Articles allow for written resolutions, they do not specifically clarify whether the process for a sole director making decisions should be any different from that for a company with multiple directors.
This ambiguity created confusion, leading to a challenge over the legitimacy of the decisions made by the sole director and the company’s governance structure. Essentially, the case asked whether a sole director could rely on written resolutions in the same way as multiple directors or whether a different procedure was necessary.
Court’s Analysis and Judgment
The judge concurred with the fundamental principle that if a company adopts the Model Articles but modifies them to require a minimum number of directors, a sole director cannot exercise all the powers of the company under Model Article 7(2). This was the situation in Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch), and the judge in this case confirmed that decision.
The court ruled that when a company adopts the Model Articles without modification, a sole director has the authority to make all company decisions, and Model Article 11(2) does not require a minimum number of directors, regardless of how many directors the company may have had in the past.
The case also reinforces the importance of clear, well-drafted corporate governance documents. For businesses that operate with a sole director, the court implied that simply relying on the Model Articles without considering the company’s unique circumstances could lead to challenges and disputes over decision-making.
Conclusion
The many benefits of adopting the Model Articles are clarity, simplicity and cost-effectiveness, ease of adoption, a standardised framework for decision-making, director responsibilities, shareholder rights, legal approval and recognition, and their proven track record.
KRF Services (UK) Ltd has highlighted the potential pitfalls of using the default Model Articles. It serves as a warning to businesses that simply relying on the Model Articles without tailoring them to the company’s unique structure can lead to legal challenges. The case highlights the need for careful attention to corporate governance documents, particularly for companies with a sole director, to ensure that decision-making processes are transparent, valid, and legally sound.
The ruling also reminds companies to keep their governance documents updated and in line with their actual operational practices. As businesses evolve, so should their governance structures, ensuring that legal uncertainties are minimised.