What happens if a company’s sole director/shareholder dies?

It is not uncommon for one person to be the sole director and shareholder of a private limited company. In that situation, all the power and legal authority to make decisions on behalf of the company rests with that one individual. In the event that that individual dies, the continued existence of the company and its business can be placed under threat.

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Death of the sole director

In a company where there is one shareholder but multiple directors, if one director dies, the surviving directors could continue to run the company. In a company where there is one director but multiple shareholders, if the director died, the surviving shareholders could appoint a new director. The issue arises where one individual is the sole director and the sole shareholder.

If the sole director and shareholder dies, there is nobody left who can manage the company. Problems that could arise might include suppliers and employees not being paid due to a lack of a valid bank mandate. Significant assets could be frozen, as there is nobody left in the company who has the authority to manage those assets. Without access to its bank accounts, the company could find itself at serious risk of breaching the Companies Act 2006 and even ceasing to trade altogether. 

Businesses incorporated under the Companies Act 2006

If a company was incorporated under the Companies Act 2006 and adopted the model articles, provision has been made for such circumstances. Model article 17(2) gives the deceased’s personal representatives authority to appoint a new director.

If a company has adopted bespoke articles, the articles will need to be reviewed to ensure that this provision has been made.

However, this provision was not automatically available for earlier companies who were incorporated under the Companies Act 1985.

Businesses incorporated under the Companies Act 1985

Many companies that were incorporated before 1st October 2009 adopted articles of association in an earlier form, called “Table A”. Table A articles do not give personal representatives the authority to appoint a new director until they are added to the register of members, which cannot happen until a grant of probate is obtained. Once they have been added to the register of members, they can pass a resolution to appoint a new director, which would allow the company’s normal activities to continue. However, obtaining a grant of probate can be a very lengthy process, and this delay can be catastrophic for the company.

Until the grant of probate is obtained, the company would be stuck in limbo and would be at risk of having its assets frozen. This could ultimately prevent the company from being able to pay employees’ salaries, pay VAT and potentially continue trading entirely.

This situation can cause a great deal of worry for the deceased director/shareholder’s executors. However, a recent development stemming from case law has provided a solution, which ensures that the company can continue operating as usual.

Case law - Ellott v Cimarron UK Ltd

The recent case of Ellott v Cimarron UK Ltd has indicated that a personal representative can rectify the company’s register of members and appoint directors without a Grant of Probate being issued.

The deceased was the sole shareholder, director, and secretary of the company in question.

Her Will appointed her husband as the sole executor and gifted 40% of the company’s shareholdings to him. The remaining 60% of the shareholdings were divided equally between two employees.

The executor wished to appoint the two above-mentioned employees as the new directors of the company, but he was unable to do so, as he did not have authority to vote on a resolution appointing new directors. Under the company’s articles (in form Table A), the director would have had to wait for the grant of probate to be issued before he could appoint the new directors. This could have taken several months, and could have caused serious issues for the running of the company.

The executor therefore sought an order from the court permitting him to rectify the register of members to remove the deceased’s name and replace it with his own, before obtaining the Grant of Probate.

The application was successful and the court granted the order, on the basis that the delay would put the company in unacceptable jeopardy. The court was satisfied that an executor can be registered as a shareholder without obtaining grant of probate, where there is no dispute as to their title.

In doing so, the court offered a solution to a common challenge faced by executors.

The court was clear that in most situations, a grant of probate should still be obtained before the register of members is updated, but in exceptional circumstances this is not necessary.

Appointing a new director before probate is granted

The ability to rectify the register of members before obtaining a grant of probate enables executors to ensure that the company can continue running, which is in both the company and the deceased’s estate’s best interests.

Where a sole director/shareholder dies and the register of members needs to be rectified, the executors will need to make an application to court to give them authority to do so. It is essential that this application is made as soon as possible, to ensure that the executors comply with their duties to the estate, and to avoid future complications arising.

How can Goughs help?

At Goughs, we can assist you in making an application for a grant of probate and an application to the court, to ensure that the company can continue to trade as normal upon the death of a sole director and shareholder.

If you would like further information regarding probate and in particular, estates which comprise shareholdings, please contact a member of our Private Wealth team today.

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