• The court examines once again the extent of the authority of a sole director of a company
• The court interprets the interaction of a specific indemnity with a price determination mechanism in a share sale agreement

Model Articles permitted company to operate with a sole director

The High Court has held that a company which had adopted the Model Articles without modification was able to operate and take decisions while it had only one director, in a decision that will hopefully now clarify this area of the law.

In the matter of KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) concerned a company with a sole director.

The company had not always had a sole director. However, following the imposition of financial sanctions on the person identified by the relevant authority as the company’s ultimate beneficial owner, it found itself with a single director and no persons willing to be appointed as additional directors.

Those same financial sanctions also severely impacted the company’s business to the point that, in May 2024, the company’s sole director applied to court to place the company into administration.

Although the application was not contentious, there was a concern, based on previous case law, that, as the company had adopted the Model Articles without amendment as its constitution, its sole director may not have had authority to make that application.

In particular, in 2022, in the case of Fore Fitness Holdings Ltd [2022] EWHC 191 (Ch), the High Court held that the sole director of a company that had adopted the Model Articles, but with modifications, was not able to take decisions other than to appoint more directors. This was because the modifications to the Model Articles had introduced a requirement for a minimum number of directors.

Later in 2022, in the case of Active Wear Ltd [2022] EWHC 2340 (Ch), the High Court considered the issue again, but in relation to a company that had adopted the Model Articles without modification and which had only ever had one director. It held that the sole director had authority to take all decisions on behalf of the company.

However, the judge in Active Wear suggested that this would not have been the case if the company had previously had more than one director. This was the situation in which the company in KRF Services found itself.

The judge agreed that, where a company has adopted the Model Articles but modified them to require a minimum number of directors, then a sole director cannot exercise all powers of the company. This is what had happened in Fore Fitness, and the judge approved that decision.

However, the judge also concluded that, where a company has adopted the Model Articles without modification, a sole director can take all decisions of the company, and it does not matter how many directors the company has had in the past.

Read more about the court’s decision on the authority of a sole director of a company to take decisions alone in our separate in-depth piece

Court interprets interaction of indemnity and price adjustment mechanism

The High Court has interpreted the interaction of a post-completion price determination mechanism and an indemnity in a share sale and purchase agreement, finding that the existence of an indemnity for particular matters did not prevent those matters from being factored into the price determination.

Adie and anor v Ingenuity Digital Ltd [2024] EWHC 2902 (Ch) concerned an agreement (the SPA), under which two individuals sold all their shares in two companies to a corporate buyer.

The price payable for the shares was structured as an initial payment on completion of the sale, followed by a deferred payment to be paid after completion.

The SPA contained a schedule setting out a specific methodology for calculating the deferred payment, under which the buyer would produce a completion statement and submit it to the sellers. The deferred payment was to be calculated by reference to a multiple of the target companies’ EBITDA.

Shortly before the date scheduled for signing the SPA, a key customer of one of the target companies raised a complaint about the target company’s performance under a contract. The customer stated that, unless its complaints were resolved, it reserved the right to terminate the contract, seek repayment of sums it had paid, withhold payment on outstanding invoices and claim damages.

In response to this, the buyer and sellers included a third indemnity in the SPA in favour of the buyer in relation to the alleged breach by the target company of its contracts with the customer in question.

In the event, the claim between the target company and the customer was not resolved and became a full-scale dispute.

Following completion, the buyer produced the completion statement required by the SPA and sent it to the sellers. In compiling the statement, the buyer made a deduction from the target companies’ EBIDTA to reflect the dispute with the customer, which would in turn reduce the deferred payment.

The sellers argued that the buyer was not entitled to make a deduction under the price determination mechanism, because the parties had addressed the customer dispute through an indemnity and that indemnity was the buyer’s sole means of recovering compensation in relation to the dispute.

The court disagreed. The SPA contained no express term excluding the effects of the customer dispute from the EBITDA calculation.

Nor was the court able to imply a term into the SPA to this effect. The price determination mechanism and the indemnity were designed to achieve different things, and there was no obvious reason why the customer dispute should be excluded from the price determination mechanism whether other indemnities were not.

Read more about the court’s approach to the interaction of an indemnity with a price determination mechanism in our separate in-depth piece