Sole Directors and Model Articles – Problem Solved?

Traditionally, it had been assumed that Model Article 7(2) – while a company only has a sole director, and there is no requirement to have more, the general rule does not apply and a sole director can take decisions – took precedence over Model Articles 11(2) and 11(3), allowing a sole director to make decisions without the need for a board meeting of at least two directors. Hashimi took a knife to this interpretation.

However, Hashmi must be considered in the context of its facts – the articles of association of the company in question, Fore Fitness Investment Holdings Ltd, contained a bespoke article requiring two individuals to be present for any board meeting – the Judge found that the Model Articles without modifications are unfit for purpose when a company has a sole director.

In the later case of Active Wear, the Model Articles were unmodified, and the court refused to find that Model Article 11(2) carried with it the implied requirement of a minimum of two directors. However, obiter comments in Active Wear raised an important question as to situations where a company adopts the Model Articles without modification but on incorporation has more than one director, which is later reduced to a sole director. The judge’s comments suggested that, in such a case, Model Article 11(3) does set a minimum number and prevents a sole director from making any decisions apart from appointing further directors.

While the obiter comments in Active Wear were not binding, for the past two years an uneasy judicial status quo has existed which forces companies and solicitors to draft articles of association with specific care taken to ensure that sole directors can make decisions legally.

The recent decision in KRF Services (UK) Ltd [2023] EWHC 2978 (Ch) has, hopefully, delivered a final answer to this question. The judge agreed with the decision in Hashimi that, if a company has adopted the Model Articles but modified them to require a minimum number of directors, then a sole director cannot make decisions.  He also agreed with the decision in Active Wear that Model Article 11(2) does not mandate a minimum number of directors. However, he disagreed with the obiter comments in Active Wear regarding situations where a company initially had more than one director but was forced, through one reason or another, to reduce this number to a sole director. He found that, where the Model Articles are unamended, Model Article 11(2) does not require companies to have at least two directors instead, and in line with pre-Hashimi thinking, the sole director can exercise full authority to make decision on behalf of the company.

Therefore, the position is now far clearer: unless there is a bespoke article mandating a minimum number of directors, the sole director can exercise full discretion to make decisions on behalf of the company (the Model Articles do not require a minimum number of directors).  Of course, this decision is still subject to appeal, and we may yet see further changes to the case law.  But the current judicial position, post-KRF Services, is far more representative of practitioners’ thinking and will be welcomed widely.