We often see private limited companies operated by a sole director who is also the sole shareholder. This is a very common structure, particularly within small to medium size businesses, but have you thought about what happens to the company following the sole director shareholder’s death? The consequences can be significant, but there are ways to resolve or implement measures to better safeguard the company if this situation were to arise.
What to do when a sole shareholder dies?
Your first point of call should be to check whether the deceased shareholder has a valid and executed Will in place.
- If there is a Will, an executor will be appointed who will then become a personal representative (“PR”) of the deceased shareholder’s estate upon obtaining a grant of probate. Once obtained, the legal title in the shares will be vested in the PR, who can deal with the shares in accordance with the Will.
- If there is no Will, a grant of representation will be required, and until an administrator is appointed, the legal title in the shares cannot be vested anywhere else.
Voting rights attached to the shares cannot be exercised until either (a) the PR or administrator or (b) the beneficiary has been added to the company’s register of members.
You should check the company’s articles of association for any restrictions against PRs having the legal title to the shares vested to them, and any prohibitions from being entered into the register of members. If your company has post-2006 model articles, evidence detailing the PR’s right to be appointed into the register of members is required – usually, this is the grant of probate.
Either way, obtaining a grant of probate or representation is a notoriously long process and may take several weeks or months to obtain. This can leave a company in a period of uncertainty, where it is unable to pass decisions reserved for shareholders’ resolutions. Examples include:
- selling the shares to a third party;
- changing the company’s accounting reference date;
- changing the company’s name;
- securing finance over assets of the company;
- varying share class rights; and
- voluntarily winding the company up.
For the PRs to exercise the voting rights of the shares, the company director(s) must approve and authorise that the PR be added to the register of members. This is easily dealt with (by way of a board resolution) if there is a director in place.
What happens if the deceased shareholder is also the sole director?
If there are no surviving directors or secretary to accept transmission of PRs, then the PRs cannot be added to the register of members. Without registration, the legal title to the shares will not vest in the PRs – leaving the company with no shareholders, no directors, and no ability to appoint further shareholders or directors.
Directors are responsible for the company’s day-to-day activity, so the practical consequences may be significant as the company is at risk of becoming operationally paralysed. For example:
- The company’s assets may be frozen;
- Employee salaries and other key payroll functions may go unprocessed, as well as authorising payments to its suppliers, customers, tax authorities and other creditors.
- Without director authorisation, the company will have limited capability to manage existing and/or enter into new supply or customer contracts.
In essence, business continuity may become critically affected and, in turn, result in the company ceasing its trading or being wound up.
How can a company overcome this?
Depending on which articles the company has adopted, matters may become very complicated to resolve. You should first check the company’s articles to see if the PR has the authority to appoint a director. Once appointed, the new director can add the PR to the register of members.
- If the company was incorporated post-2006 or has adopted post-2006 model articles:
- model article 17 allows the PR(s) of the last surviving shareholder, by notice in writing, to appoint a director if a company, as a result of death, no longer has a shareholder and director.
- This is a simple solution, and once appointed, the new director(s) can pass a board resolution to approve and add the PR to the register of members.
- If the company was incorporated pre-2006 or has not amended its Table A articles:
- The articles are silent on this element, meaning the PRs do not have the authority to appoint a replacement director in these circumstances. As mentioned above, this will leave the company struck and without the means to appoint additional directors or update the register of members.
Applying to Court
If a company’s articles do not contain model article 17 or an equivalent provision, the company will need to apply to the court under s.125 Companies Act 2006 to (a) rectify the company’s register of members; and (b) authorise the PR to carry out that rectification.
The court, when assessing an application to rectify, will exercise it discretion very widely and consider each case on its facts. Recent case law has shown that the following key factors have been influential for the court to grant an order under s.125 Companies Act 2006:
- If there is no dispute as to the title of the deceased shareholder’s shareholding.
- If the company’s business operations would undergo irreparable damage or put the company in unacceptable jeopardy if the issue is not urgently resolved. Examples shown in recent case law include accounting for tax liabilities to HMRC, settling liabilities with creditors, and/or, in the court’s opinion, there is a legitimate concern that the business operations would fail.
- If the company has no other option but to make the court application.
Court applications can be costly, time consuming and, due to the wide discretion that the court applies, no guarantee that an order will be granted. Sole director shareholders should consider planning ahead and implementing measure to better safeguard their company’s future – before it is too late.
Planning ahead and how we can help:
- Review and, where appropriate, update your company’s articles:
- If the company does not have post-2006 model articles or contain an article similar to Model Article 17 (allowing PRs to appoint a sole director), consider passing a special resolution of the shareholders to amend the articles to that effect.
- Succession Planning – Do you have a valid and executed Will in place?
- This will reduce the period of uncertainty for the company dramatically – as this will provide a clear road map for to whom the shares will pass to in the interest of obtaining a grant of probate as quickly as possible.
- Review the company’s articles of association to ensure that they align with the latest valid Will of the sole shareholders. For example, are there any restriction in the company’s articles which would prevent the shares to pass to the beneficiary named in the Will?
- At what point should the sole director and shareholder consider handing over the reins of the company? Whether that be to appoint a new director, or perhaps alter the company’s shareholding before or after death? This article does not cover what (if any) tax implications could ensue if the shareholding is altered.
- Risk Management
- Is the company’s know-how and expertise vested in the sole director shareholder? If so, you may consider whether measures should be put in place to implement any knowledge transfer to the company’s successors.
- Who holds the company’s passwords and authority to authorise payments? If this is the sole director, should a contingency plan be set up whereby a trusted employee can hold these privileges as a backup?
- Who has the authority to negotiate, enter into, and manage supplier and customer contracts? Again, can this be trusted with an employee or could such privileges be passed on to a second director?
Here at Fisher Jones Greenwood LLP, we can assist in reviewing and updating your company’s articles. We can also review and advise upon what a company or shareholder can put in place for their succession plan. Please contact the Corporate and Commercial team at Fisher Jones Greenwood LLP on 01206 835300 or contact us to see how we can help.