Death of a Sole Director-Shareholder

And how to keep business continuity if company decisions cannot be made

Keeping business continuity and legal authority if some thing happens to a sole director of a small business

The recent case of Kings Court Trust Ltd & Ors v Lancashire Cleaning Services Ltd [2017] EWHC 1094 (Ch) highlights the importance of small business owners taking some recommended steps to ensure business continuity where they are the sole director-shareholder of their company.

A limited company has separate legal personality and it is possible for one person to be the only director and shareholder of the company. It is also now common for companies to no longer appoint a separate individual as company secretary or indeed to have one at all.

This means that all of the power and legal authority to make decisions for the company rests with one individual. Upon that individual’s death, the continued existence of the company and its business can be under threat. There may be significant assets in the name of the company which effectively become frozen and cannot be accessed as no one exists with the authority to make decisions or take action at either director or shareholder level. For example, suppliers and employees may need to be paid, but no one has the authority with the bank to action payments.

When a shareholder dies, his shares pass by operation of law to his personal representatives or administrators who then have a general right to be entered into a company’s register of members as the new shareholder or transfer the shares to some other party, perhaps a beneficiary of the deceased’s estate, who are then registered as the new shareholder.

However a problem can arise

For companies incorporated under the Companies Act 1985, with Table A articles, the personal representatives (PRs) of the deceased sole shareholder do not have a built in right to appoint a new director who can then undertake the necessary formalities within the company to register the PRs as the new owners of the shares. Until registered, the PRs are prevented from exercising rights as shareholders such as passing resolutions to appoint a new director.

Without a director or secretary with the authority to register the PRs or beneficiary’s name in the members’ register, the company is effectively stuck in a vacuum.

In such circumstances it is necessary to apply to the court for an order to appoint a new director in order to bring the company out of this vacuum.

The position is different for companies incorporated under the Companies Act 2006, where the Model Articles permit the PRs of the deceased last shareholder to appoint a director to facilitate registration of their names in the register of shareholders, enabling the company to continue to operate.

If you run your business through a personally owned company where you are the sole director-shareholder and company’s articles of association have not been reviewed recently, we would recommend reviewing and updating them where appropriate to provide for this right. This is a relatively simple process of passing a resolution updating the wording in the articles and filing the new version at Companies House.

Lasting Powers of Attorney

Business continuity can also be drastically affected if the sole director-shareholder becomes severely ill or incapable of acting, if he suffers a stroke for example, or he gets caught overseas by an Icelandic volcano or airline computer meltdown.

By granting a Lasting Power of Attorney (LPA), a sole director-shareholder can appoint one or more attorneys to deal with his affairs including exercising his rights as shareholder of his company, commencing immediately or upon him suffering mental incapacity. This can be useful in the case of advanced terminal illness, to ensure that family members have the ability to assume control over decisions of the donor prior to death, including certain decisions relating to the company but also to cater for situations where the sole director-shareholder finds himself away from the office unexpectedly.

When dealing with company decision making, the articles of association and the provisions of the Companies Act must always be reviewed to ensure the attorney can validly exercise such decision making and that the existing articles of association will not unwittingly override or restrict the donor’s wish for his attorney to have the right to exercise his rights as shareholder.

By making sure the articles of association are updated and putting in place an LPA during his lifetime, the sole director-shareholder can certainly help future-proof the company from entering the power and authority vacuum upon his death or incapacity.

This can be vital where the company is continuing to trade, is receiving monies or needs to pay them out to keep the business on track, let alone paying the staff!

From a company law perspective, the sole director-shareholder wears two hats which are quite different. Whereas a shareholder can appoint an attorney to exercise his rights as shareholder it should be noted that the role of director and the discharge of duties of an individual director are personal and cannot be delegated to a third party by way of a power of attorney.

It is worth noting that an ordinary power of attorney can be granted by the company (for example to a third party to execute deeds on behalf of the company) or by the board of directors collectively to an attorney to exercise the certain powers conferred upon the board as a whole. The articles of association should again be checked to ensure they permit this (in general terms both Table A and Model Articles do).

LPAs fall into two categories: health and welfare and property and financial affairs.

Property and financial affairs LPAs can take effect immediately or upon the donor’s mental incapacity. These may be used to appoint an attorney to deal with buying and selling assets for the donor, opening and closing bank accounts, dealing with payment of mortgage, rent and household bills on behalf of the donor who may be temporarily unavailable or has become mentally incapable.

Health and welfare LPAs can only take effect upon the donor suffering mental incapacity.

Two further important points to note are that an LPA must be registered with the Office of the Public Guardian before use and the LPA will come to an end on the death of the donor.

If you are the sole-director shareholder of your company, now could be a good time to have your articles of association health-checked and to consider putting in place one or more LPAs to provide for the future.

LPAs are of course of more general use and value and alongside ensuring your Will is up to date, you should consider putting in place an LPA.

For further information on the companies law aspects of this article please contact:

Ed Taylor, Senior Associate

ed.taylor@hcsolicitors.co.uk

and for further information regarding LPAs and other areas of Wills, Trusts & Probate please contact:

Henry Anstey, Partner

henry.anstey@hcsolicitors.co.uk

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.