British court confirms the decision-making capacity of sole directors

Following the decisions in ForeFitness And Active clothing – When the court considered the validity of decisions taken by a sole director of a company operating in whole or in part under the Model Articles(1), the situation was not fully clarified.

Uncertainty is greater in the context of administrative appointments, where the validity of an appointment depends on the appointer’s authority to make an appointment. If there is no authority, the validity of the appointment is questioned. Although Active clothing While it has brought comfort to practitioners (see discussion in our earlier blog), it left a question mark over decisions made by a sole director when the company was operating on model articles but there has been more than one director in the past – in such In some cases, could a sole director transact business?

In the recent decision of KRF Service (UK) Limited (2024), the judge had to address this issue.

In KRF The company applied for the appointment of administrators after a resolution was passed by the company’s sole director at a board meeting. Previously the company had had several directors, but at the time of the decision to appoint administrators only one was in office – the director was unable to find anyone willing to act due to sanctions issues and the other directors had resigned.

The conclusions reached are helpful to support the results in Active clothing and reflect the industry understanding of how the model items work.

To understand the conclusions, it is helpful to recap what the sample articles say regarding decision making:

• Article 7(1): establishes the general rule that decisions of the company’s directors must be either a majority decision at a meeting or a decision made in accordance with Article 8 (Article 8 provides for a unanimous decision of the eligible directors).
• Article 7(2): provides that the above general rule (namely Article 7(1)) does not apply where a company has only one director and the company’s articles of association do not otherwise require that it have more than one director. Instead, the sole director can make decisions “without regard to the provisions of the articles of association regarding directors’ decision-making.”
• Article 11(2): provides that the quorum for meetings of the board of directors may be fixed from time to time by resolution of the directors but shall not be less than two. Unless otherwise specified, the standard quorum is two directors.
• Article 11(3): It then states that if the total number of directors is less than the required quorum, the directors are prohibited from making any decision other than appointing additional directors or calling a general meeting to allow shareholders to appoint additional directors.

The previous decisions of ForeFitness And Active clothing examined the interaction of Article 7(2), which allows sole directors to make decisions, and Article 11(3), which limits the powers of a director when the quorum is less than required (which is two under Article 11(2)) – The question was really about whether Article 11 applies when a company has a sole director.

Below are the key takeaways from the case:

(A) For Article 7(2) to apply, the following conditions must be met: first, that the company has “only” one director; and secondly, that “no provision of the articles of association requires” that there be more than one director.

(B) The first condition is expressed in the currently tense. Therefore, the fact that a company has had more than one managing 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 met.

(C) The second condition depends on whether the articles of association contain a provision requiring more than one director.

In KRF The company operated only under the model articles of association; there were no tailor-made articles establishing a quorum of more than one. Article 11 does not require that a company have more than one director. Accordingly, the second requirement was also met.

This also explains the difference between the results in KRF And ForeFitness. In ForeFitness The company operated on a mix of model articles and bespoke articles, which stipulated a minimum quorum requirement of two. Accordingly, because the minimum quorum requirements were not met For Fitness, Article 11 paragraph 3 was applied, which limited the decision-making of the sole director.

(D) If the first and second conditions are met, a sole director can “make decisions without regard to the provisions of the articles of association relating to the decision-making of directors.” In such a case, Article 7(2) shall apply and Article 11 as a whole shall not apply.

(e) In situations where a company previously had more than one director, the quorum for meetings of directors during the period in which there is more than one director is, in accordance with Article 11(2), two – or more if the directors have decided to to fix it to a larger number. In this situation, Article 11(3) then limits the powers of directors if they fail to meet these quorum requirements.

What should be taken into account when appointing administrators (or checking the validity of their appointment)?

As noted, ensuring that an appointor has the authority to appoint administrators is essential to ensuring that the appointment of administrators is valid. Below we have outlined what needs to be considered in different circumstances.

The company works according to model articles and has a sole managing director

Article 7(2) applies and the sole director can make decisions – including the decision to appoint administrators.

The company works according to sample articles, customized items and has a sole managing director

Check the tailored articles to see if they specify a minimum quorum of more than one. If so, the powers of the sole manager are limited to those referred to in Article 11(3). In this situation, if a sole director decides to appoint administrators, that decision is likely to be invalid, calling into question the validity of the appointment of the administrators.

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

The company operates according to model articles of association and has several directors

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

The company works according to the model article, customized items and has several directors

Article 11(2) sets the quorum requirement at two, but it could be more if the tailored articles set the level higher. Check out the customized items.

If the special articles specify a quorum of more than two people, the corresponding quorum must be met for a valid decision. If the decision is made by a quorum body, it is likely to be invalid, calling into question the validity of the administrators’ appointment.

If the tailored articles do not specify a quorum, Article 11(2) applies and a quorum of two people is required for a valid decision.

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For a more detailed discussion of the cases of ForeFitness And Active clothing Read our previous blog.

(1) The model articles of association required for private limited companies in accordance with Schedule 1 to the Companies (Model Articles) Regulations 2008