Following the decisions in Fore Fitness and Active Wear – where the court examined the validity of decisions made by a sole director of a company that operated wholly or partly under the Model Articles[1]– the position was not entirely settled.

In the context of administration appointments where the validity of an appointment rests on the power of the appointor to make an appointment, the uncertainty is more acute. If there is no power, the validity of the appointment is brought into question. Although Active Wear did bring comfort to practitioners (see discussion in our earlier blog) it left a question mark about decisions made by a sole director where the company operated under Model Articles but historically there had been more than one director – in such instances, could a sole director transact business? 

In the recent decision of KRF Service (UK) Limited [2024] the judge had to consider that question.

In KRF the company issued an application to appoint administrators, following a resolution passed at a board meeting by the company’s sole director. The company had prevously had multiple directors, but at the time of the resolution to appoint administrators only one was in office – the director being unable to find anyone willing to act because of sanction issues, and the other directors having resigned. 

The conclusions reached are helpful in supporting the findings in Active Wear and reflect industry understanding of how the Model Articles operate.

To understand the conclusions, it is helpful to recap what the Model Articles say in respect of decision making:

• Article 7(1): sets out a general rule that decisions of the company’s directors must either be a majority decision at a meeting, or a decision made in accordance with article 8 (article 8 provides for unanimous decision of eligible directors).
• Article 7(2): provides that where a company only has one director and the company’s articles do not otherwise require it to have more than one director, the general rule above (namely Article 7(1)) does not apply. Instead, the sole director may take decisions “without regard to any of the provisions of the articles relating to directors’ decision-making”.
• Article 11(2): says that the quorum for board meetings may be fixed from time to time by a decision of the directors, but it cannot be less than two, and unless otherwise fixed, the default quorum is two directors.
• Article 11(3): then states that where the total number of directors is less than the required quorum, the directors are restricted from taking any decision other than a decision to appoint further directors, or to call a general meeting to enable the shareholders to appoint further directors.

The previous decisions of Fore Fitness and Active Wear examined the interaction of Article 7(2) which permits sole directors to take decisions, and Article 11(3) which limits the power of a director when the quorum is less than required (which under Article 11(2) is two) – the question really turned on whether Article 11 applies when a company has a sole director.

The following are the key take aways from the case:

(a) For Article 7(2) to apply the following conditions should be met: first, that the company “only has” one director; and second, that “no provision of the articles requires it to have” more than one director.

(b) The first condition is expressed in the present tense. Thus, the fact that a company has had more than one director in the past is irrelevant.

In KRF the company only had one director at the time of the decision to appoint administrators – so the first condition was satisfied.

(c) The second condition depends on whether there is a provision in the articles requiring more than one director.

In KRF the company operated under the Model Articles only, there were no bespoke articles that fixed a quorum at more than one. Article 11 does not require a company to have more than one director. Accordingly, the second condition was also met.

This also explains the difference between the findings in KRF and Fore Fitness. In Fore Fitness the company operated under a mixture of the Model Articles and bespoke articles that set a minimum quorum requirement of two. Accordingly, because the minimum quorum requirements were not met in Fore Fitness, Article 11(3) applied which restricted the decision-making of the sole director.

(d) If the first and second conditions are met, then a sole director “may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making”. In such a case Article 7(2) applies, and Article 11 as a whole is disapplied.

(e) In situations where a company has previously had more than one director, then during the period where there is more than one director the quorum for directors’ meetings is two, as a result of Article 11(2) – or more if the directors have resolved to fix it at a greater number. In this situation, Article 11(3) then limits the powers of the directors if they do not meet those quorum requirements.

What needs to be considered when appointing administrators (or reviewing the validiy of their appointment)?

As noted, ensuring that an appointor has power to appoint administrators is essential to ensuring that the appointment of administrators is valid. We have set out what to consider in the different circumstances below.

The Company operates under Model Articles and has a sole director

Article 7(2) will apply, and the sole director can make decisions – including a decision to appoint administrators. 

The Company operates under Model Articles, bespoke articles and has a sole director

Check the bespoke articles, do they set a minimum quorum requirement of more than one. If yes, the sole director’s powers are limited to those set out in Article 11(3). In this situation if a sole director decides to appoint administrators that decision is likely invalid, bringing into question the validity of the administrators’ appointment.

If the bespoke articles do not set a minimum quorum requirement of more than one, Article 7(2) applies, and a sole director can make decisions – including a decision to appoint administrators.

The Company operates under Model Articles and has Multiple Directors

Article 11(2) sets the quorum requirements at two, therefore a valid decision requires at least two directors to make that decision. If the quorum requirements are not met when resolving to appoint administrators, the decision is likely invalid, bringing into question the validity of the administrators’ appointment.

The Company operates under Model Article, bespoke articles and has Multiple Directors

Article 11(2) sets the quorum requirements at two, but it could be more if the bespoke articles set the level higher. Check the bespoke articles.

If the bespoke articles set quorum at more than two, the relevant quorum must be met for there to be a valid decision. If the decision is made by an inquorate board, it is likely invalid, bringing into question the validity of the administrators’ appointment.

If the bespoke articles do not set a quorum, Article 11(2) will apply and for there to be a valid decision there must be a quorum of two.

Read More

For a fuller discussion on the cases of Fore Fitness and Active Wear read our previous blog.

[1] The Model Articles of Association prescribed for private companies limited by shares under Schedule 1 of the Companies (Model Articles) Regulations 2008