Re KRF Services (UK) Ltd - A cautionary tale of a sole director and the Sanctions Regulations

The High Court recently handed down its decision in KRF Services (UK) Ltd [2024] EWHC 2978 (Ch), which provides a long-awaited decision to confirm that a sole director of a company with unmodified Model Articles can make decisions on behalf of the company regardless of how many directors it had in the past.

The Court also held that making an administration application or order does not in principle breach The Russia (Sanctions) (EU Exit) Regulations 2019 ("Sanctions Regulations").

Background

KRF Services (UK) Ltd is a company that provides management services to the family of a person who is designated under the Sanctions Regulations.

KRF adopted unmodified Model Articles and used to have more than one director. However, following the imposition of the Sanctions Regulations, KRF found itself in a situation where the Board only constituted one director. The Board passed a resolution to make an administration application.

The questions before the Court were whether (1) the resolution passed by the Board amounts to a valid decision and (2) whether it should exercise its discretion to make an administration order in light of the Sanctions Regulations.

The sole directorship scenario

There has been a long-running tension between Model Articles 7 (2) and 11 (2).

Model Articles 7 (2) states: If (a) the company only has one director, and (b) no provision of the articles requires it to have more than one director, the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Whereas Model Articles 11 (2) states:  the quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

It is self-evidentially problematic in the scenario where a company has adopted the unmodified Model Articles but only has one director: Model Articles 11(2) requires a minimum of two directors to form a quorum whilst Model Articles 7(2) allows a sole director to make binding decisions.

On this issue, the previous case law has seemingly expressed differing approaches. In Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch), where the Articles were a mix of the Model Articles and bespoke articles, the Court found that the sole director may not be able to make a valid decision given the quorum for board meetings was two directors. The deputy judge suggested that if a company were to intend to give power to a sole director to act alone, the company should have deleted Model Articles 11(2).

In Re Active Wear Limited [2022] EWHC 2340 (Ch), the Court distinguished the findings in Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch). The company in question had not adopted any amendments to the Model Articles and had only one director. The Court found that where a company has only one director, as permitted by section 154(1) of the Companies Act 2006, and no provision of the articles requires it to have more than one director, the unambiguous effect of Article 7(2) was that it prevails over the requirement for a quorum of at least two in Article 11(2). In other words, in the case of unmodified Model Articles, the sole director has the power to pass the resolutions alone; otherwise it would have rendered Model Articles 7(2) redundant.

However, there is still a wrinkle in Re Active Wear Limited as the Judge noted that this principle only applies where there had only ever been a single director in the company's life.

The High Court decision in Re KRF Services (UK) Ltd

The Court found that the sole director in this case did have the power to pass the resolution and it was appropriate to make an administration order despite the company being designated or controlled by a sanctioned person.

The Court considered that where a company adopts the Model Articles without amendments, Model Articles 7(2) trumps the 11(2) as the Model Articles need to be internally consistent. The number of directors the company once had is neither crucial nor relevant.

The Court made its findings with consideration to Fore Fitness and Active Wear:

• Fore Fitness is distinguished as it applies to the cases where the Company indeed modified the requirement of a minimum number of directors; which was not the case in KRF Services (UK) Limited.
• The fact that KRF Services (UK) Limited had more than one director in the past is irrelevant; the Judge's view in Active Wear is simply obiter.

The Sanctions Regulations

Turning to the second issue, the Court considered that the appointment of administrators in isolation does not breach regulations 11 to 15 and 19 of the Sanctions Regulations.

The Judge held that by making the appointment itself the Court does is not making " funds " or " economic resources " available " to " a designated person (or connected person) or " for the benefit of " a designated person.

Key take-aways

The Judgement in KRF has now provided more clarity in relation to the decision-making power where there is a sole director:

1. The Model Articles do not, in itself, stipulate the requirement of the minimum number of directors.
2. However, if a company's articles specify a requirement of a minimum number of directors, the sole director would have to appoint other directors before making any valid decisions on behalf of the company;
3. If the Model Articles have been adopted without any amendments (and/or any amendments made are not related to the requirement of the minimum number of directors), the sole director may then have the power to make valid and binding decisions regardless of the number of directors historically.

This case may be of particular interest for D&O Insurers of smaller, SME companies that may find their Policyholder only has one director. This recent case suggests that the sole director's decision can be binding on the company even if the company had more than one director in the past. However, this case also reinforces the adage that "prevention is better than cure" as D&Os will want to ensure that they follow the decision-making procedures as set out in their constitution to limit the chances of future disputes.

In the context of the Sanction Regulations, this case confirms that a company can in principle make an administration application to Court even if the company itself is designated or owned or controlled by a sanctioned person.

To read the judgment, please click here.