Death of a sole shareholder director

Preparation, preparation, preparation is the often-cited mantra of many successful businesses but preparing for the death of a sole shareholder director of a business is often overlooked. This can then lead to difficulties in ensuring the operation of the company as a going concern after the death of the sole shareholder director and can lead to the company being struck off, long-established business relationships being broken, and any assets of the company becoming bona vacantia- in essence ownerless property passing to the crown.

It is not uncommon for small companies to have a sole director shareholder at the helm of the business. Although this can aid in providing the company with pin-point focus and efficiency owing to the fact that the legal authority to make decisions on behalf of the company rests with one individual, it can pose significant problems when that individual passes away.

Given that many business owners envisage the company as being part of their legacy and wish for it to be continued after their passing means that preparation is key to ensuring that this transition happens as seamlessly and smoothly as possible in what is already a time fraught with difficulties.

When a shareholder dies, their shares will generally pass to their personal representatives (PR) who will either need to be entered into the company’s register of members and appoint a new director, or transfer the shares to a beneficiary of the deceased’s estate who can then do the same.

In the case of a sole director shareholder company, this can bring about a chicken-or-egg type dilemma. Company law states that a person is only entitled to be recognised as a shareholder of a company once their details have been entered into the register of members. However, registering a new member requires the approval of the directors. If there are no directors, there is no one who can approve a new member. On the flip-side, if there are no members, there is no one who can appoint directors.

This can have fatal consequences for the running of the company. For example, the sole person with authority to make payments from the company account may be the director which means suppliers and employees may not be able to receive payment. The filings that a company is required to present to Companies House may need signing off by a director, and without this they are unable to be filed leaving the company at risk of being struck off. Also, there is a statutory requirement that there is always at least one director of a company. When the sole director shareholder dies, it can leave the company in breach of its statutory requirement and at risk of being struck off.

This can be seen in the case of Kings Court Trust Limited & Others v Lancashire Cleaning Services Limited. Following the death of the sole director shareholder, as there were no directors, the bank froze the company’s bank accounts which meant wages, invoices and VAT which were due were unable to be paid.

A majority of companies incorporated after October 2009 will have the appropriate mechanism within their Articles of Association which will allow the PRs of the deceased shareholder director to appoint a person to be a director.

However, companies incorporated before this October 2009, as was the company in the above-mentioned case, do not automatically have the mechanism mentioned above that more recently incorporated companies benefit from.

In this instance the PRs would need to make an application to the Court to request rectification of the register of members so that they could be recognised as members of the company. Only then would they be able to pass a resolution to appoint a new director to ensure the ongoing operation of the company as a going concern. This is a time-consuming and costly route which can be avoided with some preparation.

Although preparing for one’s death is not the most thrilling part of running a commercial enterprise, death is an inevitability and should be prepared for accordingly. Company owners work hard to build the value and success of their business and preparation for this inevitability in life can ensure that value is preserved and increased for future generations.

If you are a sole shareholder director, you should consider whether your current company constitutional documents are in line with your current needs and fit for purpose. If you were to pass away unexpectedly, what would happen to your company? It may be a good time to consider having a corporate governance health check on your company where issues can be identified and addressed.

You should also consider your thoughts and plans for the company to continue trading in the event of your passing. Is there anyone in particular who you would like to take the reigns after you are gone?

You should also consider whether your PRs will have the required authority to step up to the mantle of the company and take necessary steps to ensure your company is not left in an authority vacuum and vulnerable in your absence.

A small amount of preparation in advance can pay dividends in the long run, not least of all ensuring a company’s continued survival during a difficult period of change.

Asim Arshad, Solicitor within our dispute resolution and commercial teams.

Buying the Assets of a Business – Key Considerations.

When purchasing a business it is important to decide at the outset whether you are buying the shares in the company that runs the business in question or if you are buying the assets of that business. This is something which you should discuss with an Accountant, however, if you decide, following advice, that you are going to acquire the assets in the business then you should consider the following;

What assets are you buying?

When you agree a purchase price for the assets of a business it is important to be clear from the outset what you are buying. This seems like an obvious statement but many people often believe they will acquire certain assets which the seller then excludes from the sale once documentation is drafted.

The assets of a business (amongst other things) can include;

Goodwill
Equipment
Stock in Trade (in some instances stock will be valued at completion and the price of the same will be payable in addition to the agreed purchase price).
Property
How will income of the business be divided between the Buyer and Seller?

The standard position is that any amounts received on or before completion so far as they relate to a service to be provided after completion belong to the buyer and seller must pay the buyer such sums. Any amounts which are paid after completion for services received before completion belong to the seller and the buyer will need to pay such sums to the seller.

In essence a line is drawn at close of business on the day of completion. Any payments made or received before that line is drawn are for the seller, after that time everything belongs to the buyer.

You should therefore consider if the nature of the business is such that this standard position should be altered and that the ‘Business Sale and Purchase Agreement’ properly deals with this.

Are there any employees of the business?

It is extremely important that you ascertain at the outset whether you will be acquiring any employees of the business when purchasing its assets.

If any employees are transferring with the business the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply and you should seek the advice of a Employment Law Solicitor to ensure that the correct steps are taken in accordance with TUPE (Mayo Wynne Baxter have a specialist Employment Team who can assist).

Are there any business contracts which will continue post completion of the purchase?

This question is often answered as part of the due diligence process which you should instruct your solicitor to undertake for you before you commit yourself to the purchase of a business.

A business contract would be described as any or all contracts, arrangements, licences and other commitments relating to the business entered into before completion which remain to be performed by any party to them in whole or in part.

It goes without saying that you should be aware of any business contract which remains to be performed as this will be your responsibility and a potential liability for you following completion.

Are there any tax implications associated with the purchase?

This is something which should be discussed with your Accountant however some tax considerations include;

Whether the seller is VAT registered and whether the transaction will be treated as a ‘Transfer of a Going Concern’ (a TOGC).
Whether the seller has opted to tax the property (if they hold a freehold interest) or whether the landlord of the property has opted to tax it (if the seller has a leasehold interest) as VAT will then be payable on any payments due under the lease.
Whether Stamp Duty Land Tax is payable on either the acquisition of the freehold of the property or any lease of the same.
Restricting the Seller

In order to protect the assets which you are purchasing you may need to restrict the seller’s actions moving forward i.e. to restrict the seller from:-

Carrying on the same business as is being sold within a give time frame of completion and within a certain area e.g. within 2 years following completion in Brighton and Hove
Seeking the custom of any client or customer of the business within a certain period of time from completion
Engaging or employing any employees of the business.
Using the business name or any other domain name, design, logo or trademark of the business.
If you do not restrict the seller you could in theory find yourself in a situation where the seller sets up an identical business next door to the business which you have just bought and this would, of course, have an impact on the performance of your new business.

Next Steps

A properly drafted ‘Business Sale and Purchase Agreement’ will cover all of the points highlighted above and you should ensure that you instruct a solicitor to undertake a full review of the business including the title to any property which will be occupied (whether that be freehold of leasehold) before committing yourself to the purchase of a business (this process is known as ‘due diligence’). Your solicitor can then advise you on any potential liabilities and ensure that suitable warranties are included within the ‘Business Sale and Purchase Agreement’ to safeguard you moving forward.

If you are looking to purchase a business (by way of shares or assets), please contact the specialist Commercial Team at Mayo Wynne Baxter, who will be happy to assist you.

Christian Louboutin used his assistant’s red nail varnish to paint the sole of a pair of shoes in 1992 and from this developed a world famous brand which is somewhat of a phenomenon.

As Louboutin’s shoes became increasingly popular, and instantly recognisable, many high street stores across the globe started to copy the design.

Louboutin needed to do something to protect his brand – if he could not prevent others from selling shoes with red soles his brand and image would be damaged, he would no longer be able to rely on his signature sole.

Louboutin registered the red soles (Pantone 18-1663TP, to be precise) as a trademark in 2010 and specifically for high heels in 2013.

The use of colour in a trademark in the fashion industry is not uncommon, for example Levi’s jeans are instantly recognised by their red tab.

Louboutin took unauthorised use of his trademarked red sole extremely seriously. In 2012 Louboutin brought a case against the Dutch high street company Van Haren who had been selling similar, but much cheaper, red soled shoes. He also took action against the retailer, Zara, in France.

The same year Louboutin battled Yves Saint Laurent in a New York court over similar trademark issues, and won the US trademark as a result. The US courts required Louboutin to demonstrate that the colour had a secondary meaning and proof that the public associated the coloured sole with the Louboutin brand – it had a ‘source-identifying’ function.

The question in the Dutch court was whether the trademark should be the shape or the colour of the sole of the shoe.

Throughout the case the Dutch company argued that EU law prohibits the trademark of products which are common shapes such as the sole of a shoe.

At a previous hearing it was decided that the combination of a colour and shape could not be afforded trademark protection and in February an Advocate General, Macjej Szpunar, expressed doubt as to whether the red colour could perform the essential function of a trademark.

The reason behind this initial opinion was that the red soles were not separate from the shape of the high heeled shoe and shapes cannot usually be trademarked under European law.

The purpose of a trademark is to identify the brand instantly and it was considered that this would not be possible if the colour was used out of context, for example separately from the shape of a sole.

The Dutch court referred the matter to the ECJ to determine whether the prohibition on the registration of shapes as trademarks also applied to shapes combining three-dimensional properties of a product and other characteristics such as colours.

It was noted in the ECJ ruling that Louboutin was not seeking to protect the shape of the shoe but the application of a colour to a specific part of it. The shape of the shoes merely identified the positioning of the colour.

On 12 June 2018 The European Court of Justice ruled, in contradiction with the advice of the Advocate General, that the Dutch company had infringed the Louboutin trademark by selling shoes with red soles.

This was unexpected as it is unusual for the court not to follow the advice of the Advocate General, but was very much welcome news to Christian Louboutin. If Louboutin had been unsuccessful in this case it is likely that the flood of imitation products would have caused irreparable damage to this niche brand.

The matter will now be referred back to the Dutch court which is expected to confirm that the red sole trademark is valid.

It is becoming increasingly common for brands in the fashion industry to seek to protect their designs through the courts. It is interesting to note that it is not just the well known fashion houses who take this initiative. Recently the designer behind Indian brand People Tree, Orijit Sen, complained that Dior had plagiarized his block print design of a man doing yoga poses from 2000.

It will be interesting to see how the courts adapt to protect brands which have moved away from traditional logos to make their products recognisable and distinctive.

Earlier this year the Court of Appeal gave judgment in the case of Oraki and another v Bramston and another. The case involved the Court considering the liability of the Trustee in Bankruptcy for an alleged breach of duty to the bankrupts in the conduct of their respective bankruptcies, in particular it was alleged that they had prolonged the administration of the bankruptcy estates and that the bankrupts had been frustrated by them when they were seeking to annul the bankruptcies. Following a seven day trial the claims were dismissed, it was that decision which led to the Appeal.

Dr Oraki and her husband were made bankrupt in quick succession following judgment against them by a firm of solicitors in 2004. A payment in full had been offered but was not accepted as they had refused to withdraw a complaint made by them to the Law Society regarding the solicitors

The Bankruptcy Orders were made in late 2005 and early 2006. In October 2012 it was ruled that the judgment should be set aside and the bankruptcies annulled. The annulment was ordered in January 2013 and was conditional; one condition being the payment of costs and expenses of the bankruptcies, a time limit was also set as a back stop for any application to challenge the conduct of the Trustees.

In the Appeal the claims being pursued were that Dr Oraki and Mr Oraki were due damages for loss allegedly caused to them personally for breach of duty owed to them personally by their Trustees. In the lead judgment of Lord Justice David Richards he described the claims as raising “some novel and difficult issues of law on first, the duties, if any, owed by a trustee in bankruptcy to the bankrupt personally, and, second, if such duties exist, on the effect of a release under section 299 of the Act of a trustee who had ceased to hold office.” The history of the matter was fully set out in the judgment, essentially the claims were for professional negligence in that the trustee in bankruptcy through their acts and omissions failed to carry out their duties to the standard required of insolvency practitioners. It was argued that they ought to have known that the bankruptcy orders ought not to have been made and should have taken steps to bring the bankruptcies to an early end. In not doing so it was alleged that they had prolonged the duration of the bankruptcies and caused the bankrupts loss and mental distress. The Appeal failed on the facts in that there was no breach of duty, nor loss caused as a result of their actions. The section 299 issue was not therefore determined.

Whilst the findings of the Court meant that no investigation of the scope and limit of a trustee’s duty was carried out the Court observed that section 304 of the Insolvency Act provides a framework for claims for the benefit of the bankruptcy estate and whilst it is concerned with, and confined to, acts or omissions on the part of the trustee that have caused loss or damage to the estate and that the bankrupt may only apply under that section with leave of the court. What is of particular not is that it was stated this does not explain why it should be that no duty was owed to the bankrupt or “why section 304(1) provides that the sub-section is ‘without prejudice to any liability arising apart from this section’. Those words are apt to extend any claim for any common law or other duty not falling within the express terms of section 304.”

In observing that that the duties of the trustee may extend beyond section 304 the potential for claims by bankrupts against their trustees for liability arising from breach of duties has been recognised and may well lead to further litigation on the point.

Mayo Wynne Baxter have specialists who can give advice on all matters arising from insolvency of individuals or companies, should you wish to discuss any issues arising from the above please contact Darren Stone, Head of Insolvency at Mayo Wynne Baxter.