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.