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