Where a company has only one shareholder/director, and that person dies, there can be real practical problems in ensuring that the company can carry on business.
For example, often it is only a director who can authorise payments from the bank. If the sole director dies, the company may quickly face challenges in paying suppliers, employees, and other creditors.
A company in this situation will want to have a new director appointed as soon as possible.
The company’s articles of association will usually contain provisions on how new directors are appointed.
Typically, appointments can be made by shareholders or by directors.
But, if the company’s sole shareholder/director has died, then there is no-one who can exercise this power.
The only members of a company are those whose names are entered in the register of members – so unless and until that register is updated, the deceased remains the registered holder of their shares.
What can the deceased’s executors do?
Articles of association (the company’s constitution) often provide that, on a shareholder’s death, their shares vest in their executor and the executor is entitled to be registered as a shareholder.
Once the executor is registered as a shareholder, it could then appoint a new director to run the business.
However, if there are no surviving directors, there is no-one who can deal with the executor’s election and update the company’s register of members to reflect the executor as the new shareholder.
In this situation, the company’s articles of association must be checked to see whether there is any other mechanism to appoint a new director.
Examples of helpful provisions in articles of association
The articles might allow the executor to vote the deceased’s shares even though they are still registered in the deceased’s name.
That would enable the executor to appoint a new director who could then deal with updating the register of members and take control of managing the company.
Another example is a provision that, if a company has no shareholders or directors as a result of death, the personal representatives of the last shareholder to have died can appoint a person to be a director.
This enables a new director to be appointed by the personal representatives without having to be registered as a shareholder first.
Unfortunately, many companies’ articles do not contain such helpful provisions.
In particular, companies whose articles incorporate Table A (the old government-prescribed form of articles) may well find themselves without a mechanism to appoint a new director.
No surviving directors and no means to appoint a new one
In this situation, it is important to note that executors cannot just update the register of members themselves – even if they are entitled under the articles to be registered as shareholders.
Instead, the executors must apply to court and ask it to:
- order “rectification” of the register of members; and
- authorise the executors to carry out that rectification (as there is no director to do that).
Must the executors have received their grant of probate/confirmation before applying to court?
Probate (confirmation in Scotland) is the evidence of an executor’s entitlement to the shares held by the deceased.
Normally, a company should await a grant of probate before registering an executor as the holder of a deceased member’s shares.
But in a recent case, Ellot v Cimarron UK Ltd, an English court made the order for rectification after probate had been applied for but before it was granted.
In that case, the other named executors in the will (a firm of solicitors) had renounced their appointment and the other beneficiaries had not objected to the application.
There was a real risk that the company’s bank account would be frozen and it would be unable to continue to trade as a result.
The court decided that it was not necessary for the executor to obtain a grant of probate to become entitled to be registered as a shareholder where there was no dispute as to title.
This was due to the exceptional circumstances of the case. Waiting even a month or two could have put the company in unacceptable jeopardy.
Five top tips to help business owners to plan
Taxes and death being the only two certainties in life, business owners should consider contingency planning for ill health and death. This is especially important where the business owner is the sole shareholder and director.
Here are our top five tips:
- Check the articles. What provisions do they contain to cater for death of a shareholder or director? Are they adequate for the company’s current situation and suitable for the future?
- Ensure the business owner has executed a will and that its provisions regarding the shares are consistent with the company’s articles. For more on this issue, read our blog: How do you transfer shares owned by someone who has died?
- Identify point dependencies. Does all the necessary business knowledge reside in one person? Who manages all the customer and supplier relationships? Who knows the password to access the company’s computer systems? Who can authorise payments from the bank?
- Consider whether it is possible or appropriate to enable an employee to do any of these key activities. Is there any training or knowledge transfer that should be carried out so that the company can still run effectively should a director be indisposed?
- In the mid to longer term, consider succession planning. When might the business owner wish to hand over the reins? To whom? What legal and practical steps need to be taken to make this happen?
Business owners work hard to build up the value of their business. A bit of planning now will help to preserve that value. Ensuring that the business can continue to run should the worst happen will also alleviate pressure on any employees as well as the owner’s dependants. Brodies is experienced in advising businesses on both legal and practical steps to mitigate risks in this area. Please get in touch with your usual Brodies’ contact.
On May 7, 2019