Death of a sole director - Boodle Hatfield

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06 Feb 2017

Death of a sole director

Where a sole shareholder dies who is also the sole director of a company, two key issues arise for the personal representatives:

  1. To register the shares in new ownership. This will either be into the names of the personal representatives or directly into the names of the beneficiaries in due course.
  2. The immediate need to appoint a new director to manage the company. Depending on the company’s articles, it may also be necessary to appoint a secretary.

Depending on a company’s constitutional documents, there can be difficulties in achieving this. For example, Mr Perkins was the sole shareholder and director of his dry cleaning company Pristine Cleaning. The company was set up in 1999, and has been running successfully ever since. Mr Perkins died in November 2012, leaving the entire shareholding in Pristine Cleaning to his nephew Robert. The company has seen an upturn in business in recent months due to the festive season, and things have been very busy. Following Mr Perkins’ death one of the large industrial washing units has broken down and it is essential that this be fixed rapidly so that the company does not fall behind on its orders.

The personal representatives want to transfer Mr Perkins’ shares in Pristine Cleaning to Robert as soon as possible. In order validly to transfer the shares a director needs to approve the registration within two months of the transfer instrument being lodged with the company. Because Mr Perkins was the sole director of the company, and because there are no other shareholders to appoint a new director, this approval is not readily obtainable. This is because Pristine’s articles are the default articles applicable under the Companies Act 1985, and in such a situation the personal representatives would be unable to transfer ownership without a court application for the appointment of a new director – a costly and time consuming endeavour.

The situation also poses difficulties when it comes to the daily running of the company in general, as there is no party legally entitled to continue the business of Pristine Cleaning until a director is appointed. For example, the company is unable to organise the rapid repair of the washing unit without a director in place. This may lead to the loss of valuable business, and a delay in fulfilling orders may also cause lasting reputational damage. Of course Robert, as the beneficiary entitled to the shares in the company, could always arrange the repair himself and recover any expenses incurred when the transfer to him is complete. Such course of action can be a burdensome and would depend on Robert’s willingness and financial stability. Without a director in place, the company would also be in breach of its statutory requirement to have at least one natural director at all times.

As the above example clearly demonstrates, it is important for personal representatives of an estate to have the power to appoint a new director where the deceased individual was the sole director and shareholder.

How can these problems be averted?

The default position will depend on when the company was incorporated. If the company was incorporated after the 2006 Companies Act regime was introduced the outcome may be different to Mr Perkins’ situation.

Under the 2006 Companies Act, the standard position is set out in Article 17(2) of the Model Articles:

“In any case where, as a result of death, the company has no shareholders and no directors, 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.”

Therefore, assuming that the Model Articles are adopted and not modified in this respect, the position is relatively simple. In Mr. Perkins’ case, the personal representatives would be able to appoint a new director without a court order; in turn the new director will be able to approve the registration of the shares in Robert’s name.

The position can be summarised as follows, with the b scenarios in each case giving rise to problems:

Post Companies Act 2006

a. Company has adopted the default Model Articles, or modified bespoke articles to allow personal representatives to appoint a director.

b. Company articles exclude the default Model Articles applicable to companies registered after 1 October 2009, and the applicable bespoke articles do not include a right for the personal representatives to appoint a director.

Pre Companies Act 2006

a. Company articles modified to allow personal representatives to appoint a director.

b. Articles not modified to allow personal representatives to appoint a director.

In such b scenarios above, the following options may be available:

1) Amend the Articles of Association to provide the personal representatives with the power to appoint a director where there are no other shareholders or directors;

2) The company may consider appointing a company secretary, who can be given authority to register the transfer of shares.

If the sole reason for appointing a company secretary is simply the transfer of shares on the death of a single director/shareholder, it may be cheaper and easier to simply amend the company’s Articles of Association as suggested above. Companies are no longer required to appoint a secretary under current company law.

This article first appeared in the STEP Journal.