Unforeseen circumstances can render a business vulnerable. It is essential that business owners consider contingency planning for ill health and death, especially when they are the sole director and shareholder of a business.
Serious difficulties in can arise in relation to the management of a business if a sole director-shareholder dies without having planned ahead. When a sole shareholder-director dies, two key issues arise:
- The shares must be registered into new ownership. This will usually be into the name of the personal representative(s) (PR)
- A new director must be appointed to manage the company and to approve the registration of the deceased’s shares into new ownership.
When a shareholder dies, their shares pass by operation of law to their PR. The PR has a general right to be entered into the company’s register of members as the new shareholder or to transfer the shares to another party, perhaps a beneficiary of the deceased’s estate, who is then entitled to be registered as a shareholder. However, entitlement to be registered as a shareholder is not the same as being registered as a shareholder.
The issue that arises when a sole director-shareholder dies is that director authority is required to effect the registration of a shareholder. This problem can be dealt with by the company’s articles of association.
Articles of Association
A company’s articles of association play an important role in determining what should happen on the death of a sole shareholder-director.
Post Companies Act 2006
If the company was incorporated under the 2006 Companies Act regime and model articles have been adopted, then Article 17(2) allows the PR of the deceased shareholder to appoint a new director in the event that, as a result of death, the company has no shareholders or directors. The appointed director will then have the authority to register the shareholder as the owner of the deceased’s shares and the business can continue to operate smoothly.
If the company has adopted bespoke articles, these would need to be checked to ensure that this situation has been provided for.
Pre Companies Act 2006
If the company was incorporated under the 1985 Companies Act regime (or an earlier Act) and Table A articles have been adopted, then difficulties can arise as there is no such provision for the PR to appoint a director in the event that as a result of death, the company has no shareholders or directors.
The PR cannot be registered as a shareholder without director authority and therefore they must apply to court for the register of members to be amended. The process can take time and be extremely detrimental to the business, which will effectively be frozen without the appointment of anyone who is authorised to make decisions on its behalf.
If you are the sole director-shareholder of a company it is essential to review and, if necessary, update your company’s articles of association to provide for the PR of a deceased shareholder to appoint a new director in the event that as a result of death, the company has no shareholders or directors. This is a relatively simple process, which involves passing a resolution to update the articles and filing the new version at Companies House.
For more information or to find out how we can help you, please contact a member of our Corporate and Commercial Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.