Death of a sole director

Saturday, 01 February 2014
Businesses needn’t grind to a halt on death of the sole director and shareholder, explains Amanda Edwards

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

  • Registering the shares in new ownership, either into the names of the personal representatives or directly into the names of the beneficiaries in due course.
  • 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.

There can be difficulties in achieving these ends, depending on a company’s constitutional documents. For example, Mr Perkins was the sole shareholder and director of his dry cleaning company, Pristine Cleaners. He died in 2012, leaving the entire shareholding to his nephew, Robert. Following Mr Perkins’ death, one of the large industrial washing units has broken down and it is essential that this be fixed rapidly so the company does not fall behind on its orders.

The personal representatives want to transfer Mr Perkins’ shares to Robert as soon as possible. To do so validly, 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 and 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 case 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 process.

The situation also poses difficulties when it comes to the daily running of the company, as there is no party legally entitled to continue the business of Pristine until a director is appointed. For example, the company would be unable to organise the rapid repair of the washing unit. Of course, Robert, as the beneficiary entitled to the shares in the company, could always arrange the repair himself and recover any expenses when the transfer is complete, but that would depend on his 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 Companies Act 2006 regime was introduced, the outcome may be different from Mr Perkins’ situation.

Under the Companies Act 2006, 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 giving rise to problems:

Post-Companies Act 2006

  • Company has adopted the default Model Articles, or modified bespoke articles to allow personal representatives to appoint a director.
  • 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
  • Company articles modified to allow personal representatives to appoint a director.
  • Articles not modified to allow personal representatives to appoint a director.

In the b scenarios above, the following options may be available: (i) 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; (ii) 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.1  

  • 1Section 270 Companies Act 2006
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Amanda Edwards

Amanda Edwards TEP is an Associate in the Private Client and Tax department at Boodle Hatfield LLP.

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