Month: December 2024

Active Wear & Fore Fitness

The High Court decision in Re Active Wear Limited (In administration) [2022] EWHC 2340 (Ch) (“Active Wear”) clarified that a sole director can validly make decisions on behalf of a company that has adopted the unmodified Model Articles. This ruling represented a significant relief for sole directors and law practitioners, following uncertainty created by the earlier case of Re Fore Fitness Investments Holdings [2022] (“Fore Fitness”), where the Court held that at least two directors were required to make valid decisions, even under the Model Articles.

The contrasting outcomes of Active Wear and Fore Fitness underscore key distinctions in the interpretation of the Model Articles. In Fore Fitness, the company had adopted modified Model Articles, specifically altering the quorum requirements under Article 11 to require a specific number of directors to be present for decision-making. The court interpreted this modification as creating a de facto requirement for a minimum of two directors, which negated the operation of Model Article 7(2). In contrast, the Active Wear case involved unmodified Model Articles, where the court affirmed that Model Article 7(2) permits a sole director to act independently, rendering quorum provisions irrelevant. These differing interpretations highlighted the importance of whether the Model Articles were adopted in their original form or modified.

KRF Case

The issue was recently revisited and clarified in Re KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) (the “KRF Case”). The KRF Case builds on the principles established in Active Wear by clarifying how modifications to the Model Articles can override the default rule in Model Article 7(2) that allows sole director decision-making. It emphasises the need for precise drafting when altering governance documents to avoid unintended restrictions on director authority. The case concerned a company with a sole director, though this had not always been the case. Following the imposition of financial sanctions on the company’s ultimate beneficial owner (UBO), which restricted their ability to manage the business, the company found itself with only one director and no candidates willing to assume the role of additional directors. In May 2024, the sole director applied to place the company into administration due to its severe financial difficulties. Although the application was uncontested, questions arose about whether the sole director had the authority to act under the unmodified Model Articles.

What are Model Articles?

Model articles are default constitutional documents prescribed by the Companies Act 2006 for private and public companies in the UK. They govern a company’s internal management, outlining rules on director decision-making, shareholder rights, and administrative matters. Companies can adopt these articles as-is, modify them, or replace them with bespoke articles. For private companies limited by shares, Model Articles are particularly common, offering a standardised framework that simplifies governance while allowing flexibility for specific company needs. Understanding how these provisions apply is essential, especially in situations like sole director decision-making.

There are four key provisions which are relevant here:

• Model Article 7(1): decisions by directors must be taken either at a board meeting or by unanimous decision.
• Model Article 7(2): if a company has only one director and its articles do not require more than one, the sole director can make decisions without regard to other articles on directors’ decision-making.
• Model Article 11(2): the quorum for directors’ meetings is two, unless otherwise fixed, but cannot be less than two.
• Model Article 11(3): if the number of directors falls below the quorum, directors may only appoint new directors or call a general meeting to enable shareholders to appoint more directors.

Key findings in the KRF Case:

The KRF Case builds on the reasoning established in Active Wear, providing further clarity. In other words, it states that:

• Model Article 7(2) Prevails Over Article 11:

Model Article 7(2) allows a sole director to exercise all powers of the company unless a provision of the articles requires more than one director. The High Court confirmed that this article disapplies the decision-making requirements in Model Article 11 in their entirety, provided the articles do not explicitly require more than one director.

• Interpretation of Model Article 11:

Model Article 11(2) states that decisions can only be made at a quorate meeting (quorum being at least two directors unless otherwise stated). If this were read as requiring more than one director, it would render Model Article 7(2) meaningless when the company only has one director. The court thus rejected this interpretation as inconsistent with the purpose of the Model Articles.

• Sole Director Validity:

The court emphasised that the condition for Model Article 7(2) to apply, hinges on:

1. the company having only one director at the relevant time; and
2. the absence of a provision in the articles requiring more than one director.

• The Previous Multi-Director Structure is Irrelevant:

The fact that KRF Services (UK) Ltd had previously had multiple directors did not affect the application of Model Article 7(2). The present tense in the phrase “only has one director” means the director count is assessed at the time of the decision.

• Relationship with Model Article 11(3):

Model Article 11(3) limits the actions directors can take if their number falls below the quorum (e.g., appointing new directors or calling a general meeting). However, since Model Article 7(2) disapplies article 11 entirely when there is a sole director, no conflict arises between these provisions.

Practical Implications:

The decision in the KRF Case provides clarity and reassurance for sole directors of companies adopting the Model Articles. It confirms the validity of decisions made by a sole director, even if the company previously operated with multiple directors, and the intended operation of the Model Articles, emphasising their practical functionality for companies transitioning to a single-director governance structure.

It also establishes that sole directors can act confidently within the framework of the Model Articles without concerns over purported conflicts or historical directorship arrangements.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London

In its efforts to bolster the United Kingdom’s status as a global business hub (also considering the negative impacts on business activity caused by Brexit and the pandemic), the UK government has proposed the introduction of a corporate re-domiciliation regime. This proposal draws on insights from the Independent Expert Panel (the “Panel”), established to provide independent, non-binding advice on how best to develop the framework. Chaired by Professor Vanessa Knapp OBE (Officer of the Order of the British Empire) and composed of leading financial and legal professionals, the Panel has finalised its report and presented it to the government, laying the groundwork for this transformative initiative.

What is Corporate Re-Domiciliation?

Corporate re-domiciliation refers to the process by which a company moves its legal domicile from one jurisdiction to another, without altering its legal identity. The primary goal of this initiative is to enhance the UK’s attractiveness as a destination for business relocation and foreign investment.

At present, while a UK company may transfer its central place of management and control – and, therefore, its tax residency – to a foreign jurisdiction (subject to the provisions of the relevant double tax treaty, in particular with respect to residence tie-breaker rules), the UK law does not permit corporate re-domiciliation. Rather, under existing corporate law, a UK company must maintain its registered office in one of the UK jurisdictions (England and Wales, Wales, Scotland, or Northern Ireland). While a company may relocate its registered office within the same jurisdiction, it cannot transfer it to a different one. For instance, a company with its registered office in England cannot move it to Scotland. Indeed, the transfer of the registered office of a UK company to a foreign country would be akin to a winding-up: should a UK company seek corporate re-domiciliation, it would be struck-off by Companies House (i.e., removed from the register of companies held at Companies House).

Common law jurisdictions such as Singapore, Canada, New Zealand, Australia and some US states allow companies to re-domicile, enabling them to move their place of incorporation while maintaining their legal identity and business continuity. This flexibility facilitates international expansion or relocation without the need to dissolve the company and re-incorporate.

Inward vs. Outward Re-Domiciliation

Corporate re-domiciliation covers – and the Panel has supported – both inward and outward re-domiciliation.

Inward re-domiciliation allows foreign companies to move their place of incorporation to the UK from another jurisdiction. This provides them with easier access to UK capital markets and the benefits of the UK’s corporate transparency and governance standards. Currently, companies wishing to move to the UK face a complex and costly restructuring process, typically involving the creation of a new UK entity (such as inserting a new UK holding company into its group) and the cross-border transfer of assets and management to the new UK entity.

On the other hand, outward re-domiciliation would enable UK-based companies to relocate their legal domicile to a foreign jurisdiction. This process currently involves the company forfeiting its original legal identity, as the company must be formally dissolved before it can establish itself under the legal jurisdiction of another country. As a result, the company ceases to exist in its original form and must essentially be reconstituted in the new jurisdiction, complying with the legal requirements of that country. The transition involves winding up the original company’s affairs and re-registering it abroad as a new entity. However, the proposed regime seeks to simplify this by allowing companies to maintain their original legal identity and directly transfer their incorporation outside the UK, thus avoiding much of the financial and operational burden associated with the current approach.

Through this regime, the UK government is seeking to give companies greater flexibility in responding to changing market conditions. The majority of respondents to the consultation supported a two-way regime, permitting both inward and outward re-domiciliation.

However, some highlighted the principles of reciprocity, which might prevent an outgoing jurisdiction permitting re-domiciliation to the UK if the UK did not conversely allow its own companies to re-domicile overseas. Similarly, the introduction of an outward regime could also encourage companies to incorporate in the UK, knowing they have the option to relocate abroad if necessary. Many noted that a two-way regime could increase the attractiveness of a UK regime to overseas companies who may wish to have flexibility to move to or from the UK in the future.

The Application Process for Corporate Re-Domiciliation

The process for inward re-domiciliation as envisaged by the Panel shall involve submitting an application to Companies House, along with key information about the company. Some of the required details include the company’s proposed name, whether it will be public or private, its intended future activities, whether it will have share capital and, if so, a statement of capital. The goal of this process is to ensure the company complies with UK corporate regulations post-re-domiciliation, including requirements under the Companies Act 2006.

On the other hand, the process for outward re-domiciliation involves the submission to Companies House of, among other things, a special resolution passed by the company approving the proposal to apply to re-domicile to another jurisdiction, a statement of solvency and confirmation that the laws of the jurisdiction to which the company wishes to re-domicile allow it to re-domicile there as a body corporate incorporated under its laws.

Different jurisdictions will have varying procedures for de-registering a company when it seeks to re-domicile elsewhere. However, the UK’s role will be limited to assessing whether the company’s application meets the UK’s own entry/exit requirements, while compliance with the rules of the foreign jurisdiction will remain the responsibility of that jurisdiction and the re-domiciling company.

Practical Considerations

Companies considering re-domiciliation need to assess several key factors:

(A) Tax Residency: should a company’s tax residence automatically follow its corporate re-domiciliation, or should tax residency be determined by where the company’s central management and control are located? The Panel considers that matters such as the practical difficulties in determining when UK tax residence starts together with other issues as to the process for addressing dual residence and treaty tiebreakers are best addressed in HMRC Guidance and/or in a statement of practice.

Currently, as previously mentioned, a UK company may transfer its central place of management and control – and, therefore, its tax residency – to a foreign jurisdiction (subject to the provisions of relevant double tax treaties). When a company ceases to be resident in the UK, UK tax law deems the company to have disposed of all its assets at their market value immediately before the relevant time, and to have re-acquired them at that value at the relevant time. The resulting corporation tax charge is known as the “exit charge”, subject to certain exemptions.

(B) Asset Valuation: should companies re-domiciling to the UK benefit from a “step-up” in the base cost of their assets, potentially reducing future capital gains tax liabilities? The Panel has declared that certain UK tax legislation should be amended in order to ensure a common approach for the tax base cost of assets to be revalued to market value for a body corporate re-domiciling into the UK where the assets are being brought into the charge to UK tax on re-domiciliation.

(C) Stamp Duty and VAT: companies will need to consider the potential implications of re-domiciliation on stamp duty and VAT. The Panel suggests that the law should clearly state that existing group relationships within the company for UK stamp duty purposes remain intact during the re-domiciliation. This would help prevent unexpected tax charges, like losing previously claimed tax reliefs which depend on the group staying together for a certain time. It would also avoid the need to treat the company’s shares as if they were transferred, which could potentially trigger foreign taxes.

On a general note, the respondents to the consultation showed general support for re-domiciled companies to be treated the same as a UK incorporated companies for tax purposes preferring a simple UK re-domiciliation regime that is consistent with existing tax regimes, but which does not favour a new category or distinct tax treatment for re-domiciled businesses.

Geographical Limitations

The Panel does not believe that there should be a list of countries from which companies can or cannot apply to re-domicile. Instead, it recommends giving the Secretary of State the authority to issue regulations to block applications from specific countries, if needed. Additionally, the Panel suggests that the UK government should consider whether companies, or those whose majority shareholders or controlling parties are subject to UK or international sanctions, should be barred from applying for inward re-domiciliation.

Eligibility

The Panel believes that corporate re-domiciliation to the UK should be available only to bodies corporate which are solvent and intend to carry on business following their re-domiciliation: it has been suggested that certain bodies should not be eligible to apply to redomicile to the UK (e.g., where the body corporate is being wound up or is in liquidation or any proceeding to liquidate or wind up the body corporate is ongoing, seeing as the re-domiciliation process should be available to existing bodies corporate which plan to carry on business in the UK).

Protection of members and creditors

The Panel has established a structured approach to creditor protection in corporate re-domiciliation to the UK, dividing responsibility between the departing and host jurisdictions. Protection of creditors before re-domiciliation remains the responsibility of the departing jurisdiction, ensuring creditors’ rights are upheld under its legal framework. The Panel rejected a government proposal to introduce a “good faith” assessment by the UK authorities in that respect, arguing that it would overburden Companies House, reduce efficiency, and expose the regime to judicial challenges.

After re-domiciliation, creditor protection becomes the responsibility of the UK. Companies must submit a solvency statement as part of their application, modelled on section 643 of the Companies Act 2006, requiring directors to confirm the company’s ability to meet current and foreseeable liabilities. Criminal penalties for false declarations and mandatory notification of material solvency changes before completion of re-domiciliation reinforce the system’s integrity. Furthermore, solvency statements must be refreshed if applications are not resolved within six months, with refusals for companies unable to reaffirm their solvency. This framework ensures robust creditor safeguards while maintaining efficiency and alignment with international standards.

What’s Next?

While the consultation on the initial proposals closed in January 2022, the Panel recommends that further consultation should take place once the UK government has developed more specific plans also suggesting that regulators such as the Takeover Panel, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Pensions Regulator are called to advise on what changes to their rules may be required. This would give experts in particular fields the opportunity to provide feedback and help ensure that the re-domiciliation framework is both practical and effective.

Conclusion

The introduction of a corporate re-domiciliation regime would represent a significant change to UK corporate law and a major step in solidifying the UK’s position as a global business leader. As the framework continues to evolve, companies will need to stay informed about the legal, tax, and operational implications of re-domiciliation to fully leverage the benefits of this new opportunity.

By Ezio La Rosa and Annie Jandoli – Corporate Finance London