Private limited businesses often have a lone director who is also the sole shareholder. However, difficulties might occur if there is no succession plan in place to prepare the firm should this sole director shareholder die.
Companies with more than one director
It is necessary to understand how a company with more than one director functions after the death of a director or shareholder.
In these circumstances, should one director die, the remaining director(s) can continue to administer the company as before.
Where there is a lone shareholder and that shareholder dies, the directors can continue to administer the firm until the deceased’s shares are transferred to the beneficiaries.
Both scenarios above allow for ‘business as usual,’ whereas the company is likely to suffer the following issues in the absence of a director:
- An inability to access company accounts and authorise payments
- Frozen assets
- No director approval for transactions and arrangements critical to business continuity
As such, when a sole director shareholder dies there are two key issues that must be addressed:
- Who will their shares be transferred to?
- How will a new director be appointed?
If a sole director shareholder has a will, their shares typically transfer to their personal representatives (PRs) upon death, with their names then entered into the company’s register of members.
However, approval from a director is necessary for shareholders to be registered, and when a sole director shareholder dies, there
will be no director in office. The articles of association of the firm may assist in resolving this issue, but it will depend on whether the company has adopted Table A Articles, Model Articles, or bespoke Articles.
Articles of Association
Whether a PR can appoint a director to a company that has no shareholders or directors following the death of its sole director shareholder will depend on when a company was incorporated and whether its articles have since been updated.
Companies founded under the Companies Act 1985 (or an earlier Act), for example, are likely to have adopted Table A Articles, which contain no provision for a PR to appoint a director.
A court application may be necessary to include the PR as a shareholder on the register of members. This can be a lengthy process and could have a detrimental impact by potentially freezing assets.
Companies incorporated under the Companies Act 2006 and using Model Articles may grant the PR of the deceased the power to select a new director. This avoids a lengthy judicial process and allows the new director to register the PRs while the firm continues to operate.
Companies that have adopted custom articles would need to have their articles thoroughly reviewed to determine whether such a provision has been made.
Wills
Sole director shareholders should have regularly updated, valid wills, to ensure they are consistent with the company’s articles of association. This reduces the possibility of a disagreement or confusion, notably regarding the power to transfer shares upon the death of the single shareholder.
This applies to all shareholders, as leaving shares to a specified beneficiary may be prohibited by the company’s articles of association.
Decision-making
A High Court Judge recently ruled that because the articles of association of a corporation required two directors to make decisions, a solitary director could not act on the firm’s behalf. This surprise ruling called into question the legitimacy of decisions made by several corporations’ single directors.
However, another High Court Judge since ruled that the necessity under the Model Articles for at least two directors to make decisions did not supersede the decision-making powers of a solitary director in cases where there has only ever been one director.
This is a relief for many sole director shareholder companies, but it has created uncertainty about the validity of sole director decisions where model articles have not been amended because these judgements are not binding, and it adds ambiguity to the position of companies that had more than one director and then reduced to one.
Review your articles
If your business has altered the Model Articles or previously had many directors, there is still a danger that a provision in those articles may need more than one director to make decisions, and any choices you make as a solo director will be invalid.
You may need to appoint another director or change your articles to clarify a sole director’s decision-making powers, as well as pass shareholder resolutions to ratify historic decisions taken by a sole director, to avoid them being ruled invalid.
In summary, if you have any worries about the provisions in your articles, it is prudent to have them examined while also having your will created or evaluated to ensure it is consistent with the company’s articles of association.
- Katy Poole is a senior associate at Buckles Solicitors with more than 14 years of experience working with commercial and private clients. She specialises in the sale and purchase of businesses and companies.