Understanding Re KRF Services (UK) Ltd and its impact for SMEs using the model articles of association

Key contact: Jon Lawley

The High Court has provided a clearer answer to the question can a sole director run their business, or must new directors be appointed? We explain the impact of the recent judgment in Re KRF Services (UK) Ltd on the powers of single company directors.

What are the model articles?

All limited companies (no matter their size) must have articles of association. Articles of association set out the rules that company directors must follow when running their companies; including for sole directors. To assist SME business owners, the government drafted the model articles of association with the intention of simplifying matters for SMEs and avoiding the need to instruct solicitors to draft bespoke articles.

Sole directors and the model articles

Some smaller companies are run by single owner directors who both own all the shares in the company and are responsible for the day-to-day management of it as directors. When these individuals take decisions on behalf of a company incorporated with the model articles, they will either be doing so in their capacity as a director or as a shareholder.

The authority of sole directors is governed by articles 7(1), 7(2), 11(2) and 11(3) of the Model Articles: –

• article 7(2): where there is a single director appointed with no contrary provision of the articles of association, they may disregard the so-called ‘normal rule’ that directors will take decisions in a board meeting or by a ‘unanimous decision of the eligible directors’;

• article 11(2):  the quorum for a directors’ meeting can be fixed from time to time, but it cannot be less than two, and the default quorum is two; and

• article 11(3): if the total number of directors appointed is less than two, then they may not make any decisions apart from appointing new directors or calling a general meeting to allow the shareholders to appoint new directors.

A literal reading of the above provisions would restrict a single director from running their business as a sole director (for instance they would not be able to enter into contracts with third party suppliers on behalf of the company). Most practitioners previously took the view that article 7(2) of the Model Articles meant that sole directors were excluded from the effects of articles 11(2) and (3).

The situation prior to Re KRF Services

In 2022, in Fore Fitness Holdings Ltd, the High Court ruled that where a company had adopted the model articles but had inserted a bespoke article requiring a minimum of two directors to pass a decision of the company, then any decision of the directors would require a minimum of two directors even if only one was appointed. However, the latter case of Re Active Wear Ltd (Re Active Wear)concerned a scenario where the company had only appointed a single director and had adopted unamended the Model Articles. In this case, the High Court distinguished the facts from those in Fore Fitness and held that Article 7(2) of the Model Articles would prevail over the requirement for two directors set out in Model Article 11(2).

Unfortunately, Re Active Wear introduced some uncertainty due to comments made by the judge that, where a company with a sole director had previously appointed other directors, article 7(2) would not apply. This did not ultimately form part of the final decision given that in Re Active Wear there had only ever been one director appointed, but this added further layers of complexity to this area of law.

Fortunately, the recent case of Re KRF Services (UK) Ltd (Re KRF Services) has clarified the position and has been welcomed by practitioners.

How Re KRF Services has clarified the situation

In Re KRF Services, only one director remained appointed following the imposition of financial sanctions against its ultimate beneficial owner. As a result, no other directors wished to join. Crucially, there had previously been at least one other director appointed, and the company had adopted the Model Articles without modification. The sole director passed a resolution to file an administration application, and the question was whether the individual had the authority to do so.

The High Court ultimately decided that they did and to rule otherwise would have rendered Model Article 7(2) completely toothless. Therefore, article 7(2) of the Model Articles applied here notwithstanding the comments made by the judge in Re Active Wear that article 7(2) would not apply where a company with a sole director had appointed another previously. This applies in respect of unamended Model Articles only – amended articles that adopted a minimum number of directors would still be construed in the same way. 

Key takeaways for small business owners

• Model articles are not a one-size-fits-all solution. While they are meant to be convenient, they may not account for all the nuances of how a sole director should manage the company.

• As a sole director, it is important to understand that, whilst you have significant autonomy in company decision making, this autonomy is still subject to your company’s articles of association. If you intend to operate as a sole director, it may be worth seeking legal advice and asking your solicitor to draft bespoke articles to facilitate this.

• Broadly speaking, the case law now distinguishes between two scenarios:
• if the company adopts bespoke articles of association, which set a higher quorum, Model Article 7(2) will not apply; and
• if the company has appointed a single director, it is irrelevant that there may have been another director appointed in the past.

Click here to read the High Court’s decision in Re KRF Services.

For further advice about the model articles or other corporate law issues, please contact our award-winning corporate team.