Many small to medium-sized businesses operate with a structure where a sole individual serves as both the director and the shareholder of the company. While this is often a practical arrangement, it also raises important questions about what happens to the business if the sole director and shareholder dies.
Without adequate planning, the consequences can be significant, potentially leaving the company paralysed and its future uncertain.
In this blog, we’ll explore what steps can be taken in the event of the death of a sole director and shareholder, the potential risks involved, and how planning ahead can safeguard the company’s continuity.
What to Do When a Sole Shareholder Dies
The first step following the death of a sole shareholder is to determine whether they had a valid and executed Will. If a Will is in place, an executor will be appointed to act as the personal representative (PR) of the deceased’s estate. This PR can then manage the deceased’s shares in accordance with the Will, but only after obtaining a grant of probate.
If no Will exists, the process becomes more complex. A grant of representation will be required, and an administrator will need to be appointed to manage the estate. Until this is resolved, the legal title to the shares cannot be transferred, and voting rights associated with those shares cannot be exercised.
Checking the Articles of Association
The company’s articles of association should be reviewed at this stage. These articles may include restrictions on PRs holding shares or being entered into the company’s register of members. If the company operates under post-2006 model articles, evidence such as the grant of probate may be required to add the PR to the register of members.
This process can take several weeks or even months, leaving the company unable to make important shareholder decisions during this time. Examples of such decisions include:
- Selling shares to a third party.
- Changing the company’s name or accounting reference date.
- Securing finance against company assets.
- Varying share class rights.
- Voluntarily winding up the company.
When the Deceased Is Also the Sole Director
The situation becomes even more challenging if the deceased was the company’s sole director. Directors are responsible for the day-to-day management of the company, and without a director in place, the company may be unable to function effectively. This can result in:
- Frozen company assets.
- Disruption to payroll, preventing employee salaries and supplier payments from being processed.
- Inability to negotiate, enter into, or manage contracts.
- The company ceasing trading or being wound up due to operational paralysis.
Without a surviving director to approve the appointment of the PR to the register of members, the company is left with no directors, no shareholders, and no mechanism to appoint replacements. This creates a significant risk to the company’s survival.
Overcoming the Challenges
The solutions available depend heavily on the company’s articles of association. If the articles include provisions such as model article 17 (post-2006), PRs can appoint a new director by written notice. Once a director is appointed, they can pass a board resolution to add the PR to the register of members, resolving the issue swiftly.
However, if the company operates under pre-2006 articles or those without such provisions, the situation becomes more complex. In these cases, when the sole shareholder dies, the PRs lack the authority to appoint a replacement director, leaving the company without the means to appoint additional directors or update the register of members.
Applying to Court
If the articles do not support the PR’s ability to appoint a director, the company may need to apply to the court under section 125 of the Companies Act 2006. This application seeks to rectify the register of members and authorise the PR to carry out this rectification.
The court considers each case on its merits, with key factors influencing its decision, such as:
- Whether there is any dispute over the ownership of the deceased’s shares.
- The potential for irreparable harm to the company’s operations.
- Whether all other options have been exhausted.
While court applications can provide a solution, they are often time-consuming, costly, and come with no guarantee of success.
Planning Ahead: Safeguarding Your Company’s Future
To reduce the risk of disruption, sole director-shareholders should consider implementing measures to protect their company’s continuity. Key steps include:
Reviewing and Updating Articles of Association
Ensure the company’s articles include provisions similar to model article 17, allowing PRs to appoint a director if necessary. This simple update can significantly streamline the process if a sole shareholder dies.
Succession Planning
Having a valid and executed Will in place is essential. A clear and up-to-date Will provides guidance on the transfer of shares, helping to minimise delays in obtaining probate and ensuring the company can continue to operate smoothly.
It is also worth considering whether to appoint an additional director or adjust the company’s shareholding sooner rather than later. This can provide additional layers of security and reduce the risk of operational paralysis.
Risk Management
Identifying and addressing vulnerabilities within the company can also help. For example:
- Who holds access to critical passwords and payment authorisations? Consider setting up a contingency plan with a trusted employee or backup director.
- Is the company’s expertise concentrated solely in the hands of the sole director-shareholder? Knowledge transfer and documentation of key processes can ensure business continuity.
- Who has authority to manage contracts and relationships with suppliers or customers? Delegating some responsibilities may reduce the risk of disruption.
How We Can Help
At Slater Heelis, we understand the unique challenges faced by sole director-shareholders and their businesses. Our corporate legal team can provide expert advice on:
- Reviewing and updating articles of association.
- Drafting or updating Wills to ensure they align with your business needs.
- Implementing succession and contingency plans to safeguard your company’s future.
Planning ahead may seem daunting, but it’s an essential step in protecting your business from uncertainty. By taking proactive measures now, you can ensure that your company is well-prepared to face any challenges that may arise in the future.
Get in touch with us today to discuss how we can support you in safeguarding your business. If you’d like to talk to one of our team call us on 0330 111 3131 or fill out our online contact form.