Commercial Update 64: The Last One Standing… What Happens to the Company When a Sole Director Dies

When building and running a successful business, sometimes the business of dealing with estate planning can be a low priority for business owners.

In terms of a company, 2 keys questions that always come up relate to what happens on the death of shareholder and/or a director.

In the case of a deceased shareholder, the starting point is to check the most recent shareholders agreement and articles of association. If there are no specific provisions relating to the death of a shareholder, the shares will pass in accordance with the deceased’s Will or, if there is no Will, under the intestacy rules.

The key risk here is that family members with no real knowledge of the business or how it operates could then be required to make business decisions, sometimes with potentially huge consequences, at an already incredibly difficult time.

The interests of any beneficiary under a will may not also align with those of the other shareholders, which could then cause tension between relatives, as well as tension between the family and the shareholders and the company.

For a company, the death of a director has serious implications. A company director has responsibilities and the company will still need to be run.

In the case of a deceased director, practically speaking, if the company has more than one director, the remaining directors will divide the deceased director’s responsibilities between them – however do remember that the death of a director may leave difficulties in reaching a quorum for meetings, depending on what the company’s articles and any shareholders agreement states.

When a sole director dies and there are surviving shareholders or members, of course they can then hold a shareholders meeting to appoint a new director.

If the deceased was the sole director and sole shareholder of the company, the options to transfer the shares from the deceased’s estate will, ultimately, depend on what the articles of association of the company state.

If the deceased director is the only shareholder, and the company has been incorporated under the Companies Act 2006, the model articles of association do allow the personal representatives of the deceased officer to appoint a new director.

However, for companies incorporated before the implementation of the Companies Act 2006, those standard articles do not give the personal representatives the right to appoint a new director who, in turn, can deal with necessary formalities within the company in order to register the personal representatives as the owners of the shares.

This means that (assuming that no bespoke articles of association have been adopted), the personal representatives of the deceased would then have to request a court order to appoint a new director, which is likely to be time-consuming and expensive.

Any delay caused by the need to apply to the court can cause huge problems for the business as while there is no director appointed, assets in the name of the company cannot be accessed, contracts cannot be signed, and decisions cannot be made.

The easiest solution to the above would be a regular review of the articles of association and looking at a shareholders’ agreement, incorporating specific provisions dealing with the death of a shareholder. However, where a company has a sole director and sole shareholder, the articles should be updated to the post 2006 version for the reasons set out above.

At the same time as reviewing or creating a shareholders’ agreement and the articles of association, you should also look to review your Will and Lasting Powers of Attorney.

In conclusion, taking the time to plan for unexpected illness or unexpected death is important to avoid significant consequences for the next of kin of a business owner, other shareholders and for the business itself.

Stay safe and well everyone!

Regards to all,