Sole director-shareholders take note: your company could be at risk

Sole director-shareholders take note: your company could be at risk

Sole director-shareholders take note: your company could be at risk

In light of the recent case of Kings Court Trust Ltd & Ors v Lancashire Cleaning Services Ltd [2017] EWHC 1094 (Ch), it is recommended that companies with a sole director-shareholder take steps to ensure business continuity in the event of their death.

Admittedly, this isn’t the most pleasant subject to discuss in a blog post.  However, it is possible for a limited company to have only one person in place with the dual, significant, responsibility of director and shareholder.  As it is also becoming more common for companies not to appoint a separate company secretary, many companies now invest all their decision-making power and legal authority in just one person.

This means that upon that one person’s death, the continuation of the company, and the business it carries out, could be threatened.  For example, assets and bank accounts held in the company’s name have to be frozen, meaning that employees and suppliers cannot be paid, because nobody in the company has the correct authority to liaise with the bank.

A catch-22 situation can often arise when a sole director-shareholder dies.  Voting rights of their shares are suspended, unless and until their personal representatives transfer said shares to new owners, or elect to be registered as shareholders themselves.  A grant of probate must be obtained from the court (this process becomes even more complicated if no will was left), before a request can be made for directors to approve any such transfer or election.

The catch-22 situation occurs when, as is often the case, companies’ articles of association state that no such transfer or election can take place without directors’ approval, even if a grant of probate has been obtained.  Such approval is, of course, impossible to obtain in the event of the company’s sole director-shareholder’s death.

Newer companies may not have this problem, as their articles should incorporate the ‘model form’ articles prescribed in 2006 by company law.  These allow representatives to appoint a new director by serving a notice on the company, whereby no shareholders’ meeting is required, and the new director can then approve the relevant transfer or election.

An obvious response for older companies is that they should review and make appropriate changes to their articles, to ensure the company is not adversely affected should its sole director-shareholder die.  Recent case law has confirmed that the court will exercise its discretion to rectify a company’s shareholder register, thus resolving such an issue, only in exceptional circumstances.

Rickard Luckin’s specialist legal team are able to discuss any queries that may arise from sole director-shareholder issues.  If you would like to get in touch, please do so here.