Death of Sole Shareholder Directors: Potential Perils for the Company

It is common for private limited companies to have a sole shareholder who is also the company’s sole director. But unfortunately, this can, following the director’s death cause problems for the company unless appropriate arrangements are in place that allow for the appointment of new directors quickly. A company without directors can experience significant challenges in continuing to trade (ranging from frozen bank accounts, to an inability to make payments to creditors, suppliers and employees, and to enter into contracts and commitments that allow the company to continue to trade). 

Appointment of New Directors

Typically, a company’s articles of association will provide for its directors to be appointed either by the company’s shareholders, or its directors. But, if the sole shareholder director has died, there may be no mechanism by which a new director can be appointed, unless express provision is made for this in the company’s Articles of Association.

Where bespoke Articles have been adopted by a company, these may (and should be drafted so as to) allow an executor to vote in respect of the deceased’s shares to enable the appointment of a new director (even though the shares will still be registered in the deceased’s name). Where bespoke Articles have not been adopted, the ability to appoint a director in these circumstances will depend upon when the company was incorporated:

• Companies incorporated under the Companies Act 2006, which have adopted the Model Articles, allow an executor of a deceased shareholder to appoint a new director.

• Companies incorporated under the Companies Act 1985, which have adopted the Table A standard Articles, do not allow an executor to appoint a new director until the executor is registered in the company’s register of members as the holder of the deceased’s shares, which cannot take place until a grant of probate is obtained in respect of the deceased’s estate.

Obtaining a grant of probate can be a lengthy and drawn out process, during which time the company will have no directors and will be at risk of being unable to continue to trade.

Rectification of Register of Members: Court Orders

Where there are no surviving directors of a company, and no means by which the company may appoint a new director, the executors of a deceased sole shareholder director will be unable to update the company’s register of members (as new holders of the deceased’s shares) without an application to, and an order of, the Court for rectification of the register, and the Court’s authority to undertake the rectification.

As recognised above, in most cases, a company should not register an executor as the holder of a deceased shareholder’s shares before the relevant grant of probate is issued, and this can give rise to delay and place the business at risk. In recognition of this, the Courts can (and have in a recent case where there have been no dispute as to title to the shares of the deceased shareholder*, and again where certain executor undertakings have been given to the Court**) allowed executors to rectify a company’s register of members and appoint new directors without a grant of probate.   

Takeaways

Business owners should ensure that plans are in place that protect the business, and allow it to continue to trade, in the event of the owner’s death (or incapacity).

In the case of sole shareholder director companies, its articles of association should be reviewed to establish whether they include provisions that permit executors of the deceased shareholder director to appoint new directors following the shareholder director’s death (or, in the case of a sole shareholder director’s incapacity, that permit their personal representatives to appoint new directors).

Owners should also ensure that their wills are up to date and, if they are shareholders, consistent with the provisions set out in the company’s articles of association and any shareholders’ agreement.  

* Ellott –v- Cimarron UK Ltd

**  Williams –v- Russell Price Farm Services

For further information about this, please contact Corporate and Commercial Solicitor Nick Mayles.  Nick is a highly experienced transactional corporate and commercial lawyer.  If we can assist with any questions you may have in relation to your business, please get in touch by emailing nick.mayles@tsplegal.com or call 01206 574431.