The way that a company is operated matters for a variety of reasons. This article examines the details of what are called "Model Articles Of Association," a set of rules that many firms adopt. Recent court rulings raise questions about companies with such articles and where there is just one director.

Mike Barrington, senior associate in the corporate team of law firm Charles Russell Speechlys, talks about the role of sole directors in family-run firms, and what the legal issues are. This is an important topic, and family-owned/run firms are very much in the limelight in the UK. The editors value this information in stirring up conversations among our readers. Please respond if you want to continue this dialogue. To do so, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

For many family or founder-run businesses, decision-making at board level can be concentrated in a small circle of individuals who have grown the business from its foundation. Corporate governance can be punctuated by informality, with the company’s constitutional documents acting more as a general guide, rather than being followed to the letter. 

“So what?”, you might think. 

There are good reasons why operating the board in line with its constitutional documents is attractive; not least for directors evidencing compliance with their statutory duties, and making the business more attractive for prospective investors or purchasers. 

A less obvious reason is to avoid the "sole director trap," for companies which have adopted the “Model Articles of Association.” The Model Articles are a template set of constitutional rules which many companies adopt, which govern, amongst other things, board decision-making. After a series of High Court decisions, there is some ambiguity over the extent to which companies who have adopted the Model Articles and who have one director can make decisions concerning the business of the company… potentially leading to gridlock at board level.

What do the Model Articles say about sole director decision-making?

If a company adopts the Model Articles without modification, directors must take decisions either at a board meeting or by unanimous decision. If a company has only one director (and its articles do not impose a requirement to have more), the need to take decisions at a meeting or unanimously does not apply. This makes practical business sense – sole directors are broadly empowered to make decisions for the company.

So far so good.

However, there is a potential inconsistency as the Model Articles also provide that, for a board meeting to be quorate – i.e. to have enough directors present to be able to proceed – the number of directors to form a quorum can be set by the company, but it cannot be less than two (which is the default number). If there are less than the quorum at a meeting, the directors can only use their decision-making powers to appoint additional directors or to convene a shareholder meeting (so the shareholders can appoint new directors). 

Do these quorum rules impose a minimum number of directors? What can a sole director do on their own?

What has the High Court had to say about sole director companies?

Enter the High Court… 
In the 2022 Fore Fitness case, the court found that a quorum requirement for board meeting to be two directors prevented a sole director from making decisions other than to appoint additional directors. The company had previously had multiple directors, but subsequently the company was being run by a sole director. 

A later decision that year – in Active Wear Ltd – found that where a company was incorporated with only one director, the same quorum requirement of two directors didn’t apply, and so the sole director was free to make decisions without needing to appoint further directors.

Fast-forward to 2024, and the High Court decision in the KRF Services (UK) case. This time the court found that where a company adopted the Model Articles without modification – i.e., with no minimum director requirement – sole directors can make decisions on behalf of the company without needing to appoint additional directors, regardless of whether the company was incorporated with multiple directors.

What if my company has a sole director?
You might think based on the above decisions that the position is clear as mud. Although the above cases are fact-specific, after the KRF Services (UK) case we at least have some clarity. 

For companies whose articles require a minimum number of directors, a sole director will only be permitted to appoint additional directors. Where a company adopted unmodified Model Articles, or any articles which have no requirement for a specific minimum number of directors, a sole director is free to take decisions as normal, and any quorum requirements do not impact that.

Help! What can I do if my business is affected?

A sole director company with modified Model Articles could be prevented from making decisions on behalf of the company other than appointing new directors. It is also possible that prior decisions made by a sole director could be invalid. 

Where important decisions need to be made – perhaps around external investment, a potential sale, or other important commercial arrangements – being prevented from making those decisions could harm a company’s commercial success, and could certainly be a red flag to potential investors and partners.

For individual directors themselves, there are also potential consequences, stemming from breaches of the articles and their statutory duties.

The good news is that company articles can be changed. Whilst it is best to get them right first time, the articles can be updated with the votes of shareholders representing at least 75 per cent of the voting rights in the company. Although unlikely to be at the top of any smaller company’s list of priorities, making sure its constitutional arrangements work is important to ensure the functional running of the business and to future-proof against unforeseen events. 

Similarly, certain actions or decisions at board level can be ratified by shareholders. Ultimately, whilst it is advisable to avoid these types of issues entirely, their consequences can often be managed with the right advice.