The untimely death of a sole shareholder/director of a private limited company can bring business to a standstill and put considerable pressure on the deceased’s personal representatives.
All private limited companies are owned by shareholders but are usually managed on a day to day basis by directors. The shareholders are typically only involved in the decision-making process where required by law.
In many cases, a single individual is both the shareholder and director of a company. Whilst an unpleasant thought, individuals in this position ought to be mindful of the implications and impact on the company should they die; much of this will depend on the company’s articles of association.
For private limited companies which have adopted the model articles for private companies limited by shares, the position is fairly simple. Where a sole shareholder/director has died, the deceased’s personal representatives have the right (under article 17(2) of the model articles) to appoint a new director of the company, by notice in writing. Once the new director has been appointed, any transfer of the deceased’s shares to and from their personal representatives, can be formally registered by that director in the company’s registers, and the business can continue to trade.
It is not so simple for many other companies, including those which have adopted Table A (Regulations for management of a company limited by shares) as their articles of association. Table A does not contain provisions analogous to article 17(2) of the model articles. Under Table A, a company’s shareholders or directors have the power to appoint directors, which is obviously a problem if the sole shareholder/director has died. Under regulation 31 of Table A, the personal representatives of a sole shareholder/director who has died have no voting rights, until they are formally registered as shareholders of the company. Unfortunately, no such formal registration can take place where there is no director.
The issue is therefore something of a vicious circle; there are no shareholders (or directors) to appoint a director, and there is no director to formally register the personal representatives as shareholders. In this scenario, the personal representatives would need to apply for a court order to rectify the company’s register of members, thus paving the way for the appointment by the personal representatives (as shareholders of the company) of one or more directors. This may sound straightforward, but in practice, obtaining court orders can be both time-consuming and costly.
Protecting a company from the potential chaos caused by the death of its sole shareholder/director, can be achieved by making relevant modifications to the company’s articles of association. However, simply adopting the model articles will not necessarily be a perfect solution – there may be a significant period of time between the death of the sole shareholder/director, and the formal appointment of the personal representatives. A more robust approach worth considering, is to incorporate appropriate alternative director provisions into a company’s articles of association.
If you wish to discuss protecting your company with us, please do not hesitate to contact a member of our corporate and commercial team.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.