Contingency planning is something often overlooked by companies. However, it is important to take steps to plan for the unexpected and avoid potentially damaging consequences for your business.
Unforeseen circumstances can cause practical difficulties in the event of the death of a sole director-shareholder of a company. As all of the legal authority to make decisions on behalf of the company rested in the deceased, business continuity can come under threat. Amongst other things, payments to employees and creditors may not be possible, significant assets may be frozen, or shareholder/director approval for transactions may not be obtained.
By law, when a shareholder dies their share/s pass to their personal representative/s (PR) under their will or under the rules of intestacy. The PR will have a right to be entered into the register of members as a new shareholder or could transfer the shares to a third party. However, the deceased’s directorship does not pass under their will or the rules of intestacy and will terminate upon their death.
Upon the death of a sole director-shareholder, a key issue arises. A company must, by law, have at least one director. Thus, upon the death of the sole director-shareholder, the company must appoint a new director to approve the transfer and registration of the deceased’s shares. The shares are usually transferred into the name of the deceased’s personal representative.
The starting point is to look at the company’s articles, as they play an important role in determining what will happen upon the death of the sole director-shareholder.
For companies incorporated under the Companies Act 2006 adopting model articles, Article 17(2) would allow the PR to appoint a new director. If bespoke articles have been adopted, they will need to be reviewed for such a provision.
Once a director has been appointed, they will have the authority to approve the transfer and registration of the deceased’s shares; enabling the business to continue to operate.
Matters become more complicated for companies incorporated under the Companies Act 1984 with Table A articles.
Table A articles do not provide for the PR to appoint a new director, who can deal with the formalities of transferring and registering the deceased’s shares. Also, the PR cannot be registered as a shareholder without director authority. This leaves the company in a catch-22 situation. The PR cannot exercise their right as a shareholder until they are registered in the register of members. Only a director can approve the registration into the register of members. However, a shareholder resolution cannot be passed to appoint a new director.
In such instances, it is necessary to apply for a court order to amend the register of members and appoint a new director. Unfortunately, court can be a costly and lengthy process and the company will remain stuck in the vacuum until an order is finalised and will not be able to continue to trade or access its bank accounts in the meantime – which could be catastrophic.
If you are a sole director-shareholder, it is imperative that you conduct regular reviews of the company’s articles of association. Ensure that the articles contain provisions dealing with the death of a sole director-shareholder.
Another important consideration is a will. It is important that you make provision for your shares, consistent with the company’s articles.
In the long-term, consider succession planning. This will enable you to make decisions as to when you will hand over the reins, and to whom, and the steps required to make that happen.
It is advised that your articles are regularly reviewed and, if necessary, updated in order to protect the future of your company.
For more information or to find out how we can help you, please get in touch with a member of our Corporate Commercial team.
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