Private companies with a sole director shareholder (sole owner) should be aware of the risks associated with being the sole owner, particularly in the event of death. The administrative burden when a sole owner dies can be very complex and time consuming and is best avoided.
This article sets out the potential problems that can arise on the death of a sole owner, and action that a company can take to avoid such problems occurring and minimise disruption to the company.
Problem 1: Inability to appoint additional Director/s
Potential Solution: Update Articles of Association
Directors manage the company’s day-to-day affairs, such as paying employees, suppliers and other creditors and approving transactions. It is therefore important to ensure that upon the death of the sole director, a new director is appointed as soon as possible to aid business continuity. Usually, a new director is appointed by board resolution or members’ resolution. However, at Tees, we often find that a company’s articles of association do not outline how the company can appoint a new director in this scenario. This is particularly evident for companies with old-style Table A articles or bespoke articles. This means that the company may suffer as there is no one to coordinate the day-to-day management of the company.
For companies that have adopted the model articles for private limited companies, these assist by way of model article 17(2) which states that, ‘…the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director.’ This wording enables a new director to be appointed reasonably efficiently. It is, therefore, important that a company’s articles of association set out how new directors can be appointed, and Tees’ Corporate and Commercial team can assist with the review and amendment of a company’s articles of association to allow for this.
Problem 2: Shareholder does not have a valid Will
Potential Solution: Review existing Will or draw up new Will
If a sole owner dies, they remain the legal owner of the shares in the company. It is important that shareholders have a valid Will in place which appoints executors and sets out what they want to happen to their shares upon their death. The executors become the deceased’s personal representatives when the grant of probate is issued, and the legal title to the shares will vest in them via the process of transmission. However, importantly, even if the personal representatives agree to be recorded in the register of members, if there is no director to accept transmission of the shares to the personal representatives, they cannot be added to the register of members. This then prevents the personal representatives from voting to appoint the new director. This is another reason why it is important that the articles of association assist in these circumstances.
In contrast, where the sole owner had no valid Will, and therefore no executors, there will be no one to organise the deceased’s estate without a grant of representation, which can be very time consuming to obtain. It can take at least 12 weeks from submitting the application to obtain the letters of administration and in our experience, in can take a lot longer than an application for probate, as the probate office tend to take longer to process applications related to intestacy.
Therefore, in addition to having appropriate articles of association, it is beneficial for a sole owner to have a valid Will in place to determine what happens to their shares following their death. The Tees Private Client team can assist with drawing up an appropriately-detailed Will which ties in with the provisions of the company’s articles of association – see further information here: Making a Will and Trusts | Expert Legal Advice – Tees Law. Â
Problem 3: The sole owner has died without a valid Will or appropriate provisions in the articles of association
Problem 4: The sole owner has died with a valid Will, but the time taken to obtain the grant of probate is causing detriment to the company
Potential Solution: Apply to court for rectification of the register of members
If a new director cannot be appointed following the death of a sole owner, the administrators can apply to the court under section 125 of the Companies Act 2006 for rectification of the register of members. However, this is not ideal, as court applications can be costly and time-consuming, and there is no guarantee that the court will order in favour of the rectification applied for.
There are some case examples where the deceased sole owner had a valid Will, but the delay in obtaining the grant of probate caused detriment to the company. In these cases, an application to the court under section 125 was made and the court allowed the executors to be added to the register of members (as legal owner of shares in the company) even without the grant of probate, as the risks to the company in having no director caused greater urgency in allowing the transmission of the shares. However, this is not a guaranteed outcome.
In any event, applications to the court should be a last resort and can usually be avoided by actioning solutions 1 and 2 above.
Practical Points
Company sole owners should ensure good business continuity in the event of death or absence (perhaps through illness) by:
- Providing access to banking/payroll to a trusted member of the company;
- Providing access to any necessary logins/passwords;
- Ensuring the statutory registers of the company are accessible;
- Ensuring that a trusted member of the company has knowledge of or access to all contracts with suppliers and customers;
- Ensuring that all other aspects of the business, such as policies, processes, contacts, etc, are accessible to others;
- Having an up to date Will; and
- Ensuring the company’s articles allow the personal representatives to appoint a director.
Get in Contact
The Tees Corporate and Commercial team is experienced in assisting with business continuity measures, including drafting articles of association, advising on business structure and governance, and liaising closely with our Private Client team to ensure business succession planning via shareholders’ Wills.
