It is commonplace for a private limited company to have a sole director who is also the sole shareholder. However, problems can arise if a succession plan is not in place to prepare for the company’s future following the death of this sole director shareholder.
Companies with more than one director
To understand the unique position of a company with a sole director shareholder it is first important to see how a company with more than one director operates following the death of a director or shareholder.
In circumstances where a company has more than one director and one of the directors dies, the surviving director(s) can continue to run the company as before, as long as this is permitted by the company’s articles where there is a sole director.
Where a company has a sole shareholder and that person dies, the directors are able to continue to manage the company, including in the interim time, before the deceased shareholder’s shares are transferred to the beneficiaries.
Both scenarios above allow for ‘business as usual’ whereas on the death of a sole director shareholder, the company is likely to face the following problems without a director in office:
- 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, then their shares are usually passed to their personal representatives (PRs) on death. The shares can then be transferred to them and their names noted in the company’s register of members.
It sounds simple, but authority from a director is required for a shareholder to be registered and on the death of a sole director shareholder, there is no director in office. The company’s articles of association may help resolve this problem, but it will depend on whether the company has adopted Table A articles, Model Articles or bespoke Articles.
Articles of Association
Depending on when a company was incorporated and whether its articles have since been updated will determine whether a PR can appoint a director to a company that has no shareholders or directors following the death of its sole director shareholder.
For instance, companies incorporated under the Companies Act 1985 (or an earlier Act) will have adopted Table A articles, which have no provision in the unamended Table A articles for a PR to appoint a director in the circumstances detailed above.
An application to the court to amend the register of members to add the PR as a shareholder is required and this can be a lengthy process which may negatively impact the business through the freezing of assets potentially.
Companies incorporated under the Companies Act 2006 which adopt Model Articles can provide the PR of the deceased shareholder the right to appoint a new director. This avoids a protracted court process and means the new director can register the PRs and the business can continue to trade.
Those companies that have adopted bespoke articles would require a thorough review of their articles to establish whether provision has been made for a PR to appoint a new director.
Wills are a must for sole director shareholders
Everyone should have a Will, but it is critical that sole director shareholders have a valid Will and update it regularly, ensuring it is consistent with the company’s articles of association. This will reduce the likelihood of a conflict or confusion between the two documents, particularly regarding the ability to transfer the shares on the sole shareholder’s death.
This also applies to any holder of shares in that their wishes to leave shares to a named beneficiary may not be possible under the articles of association of the company.
To conclude, if you are a sole director shareholder (or know someone who is) then it is imperative that as part of the succession planning the company’s articles are reviewed. If you are in any doubt about the contents of the company’s articles or whether they require updating please contact a member of our company and commercial team and we will be happy to review them and advise you accordingly.
Decision-making by a sole director in the spotlight
A High Court Judge recently decided that because a company’s articles of association required two directors to make decisions, a sole director could not act on behalf of the company. This unexpected decision cast doubt over the validity of decisions made by the sole director of many companies.
However, another High Court Judge has since decided that the requirement in the Model Articles for there to be at least two directors to make decisions, did not override the decision-making powers of a sole director, where there has only ever been one director.
This is a relief for many sole director shareholder companies but this has created uncertainty as to the validity of sole director decisions where model articles have not been amended as these judgements are not binding and it throws further ambiguity over the position where companies had more than one director and subsequently dropped to one.
Have your articles reviewed for peace of mind
If your company has amended the Model Articles or has previously had multiple directors, there is still a risk that a provision in those articles could mean you need more than one director to make decisions and that as a sole director, any decisions you take on your own could be invalid.
You may need to appoint another director or amend your articles to make it clear about the decision-making powers of a sole director and also pass shareholder resolutions to ratify historic decisions made by a sole director, to prevent the risk of them being deemed invalid.
In short, if you have any doubts about the provisions within your articles of incorporation, it will make sense to have them reviewed and at the same time have your Will drafted or checked to ensure it is consistent with your company’s articles of association.
Please get in touch today with Katy Poole, a senior associate in the Buckles Corporate team, who will explain the next steps and how we can help you achieve the peace of mind that allows you to focus on what you do best.
