Being prepared for every eventuality is part of running a successful business, but contingency planning for ill health and death is often overlooked by business owners – particularly when they are the sole shareholder and director.
For example, issues arising may include access to company accounts, who can authorise payments to employees, suppliers, and creditors – and who should be appointed as a new director to manage the business.
Many private limited companies have a sole director and shareholder. Unless the company’s articles of association (the written rules governing how the company is run and administered) state, a company also no longer needs to appoint a separate individual as company secretary, or indeed to have one at all.
Effectively, this means that all the power and legal authority to make decisions on behalf of the company rests with one individual. Upon the death of that individual, the continued operation of the company and its business may be under threat. For example:
- there may be significant assets in the name of the company which effectively become frozen; or
- a transaction or arrangement requiring director/shareholder approval cannot be obtained; or
- suppliers and employees may need to be paid, but no one has the authority under the bank mandate to authorise such payments.
When a shareholder dies, his or her shares pass under their will/intestacy rules. His or her personal representatives or administrators have a general right to be entered into the company’s register of members, either as the new shareholder or simply to transfer the shares to some other party, perhaps a beneficiary of the deceased’s estate. The deceased’s directorship does not pass under their will/intestacy rules and terminates upon their death.
Companies incorporated under the Companies Act 1985, with Table A articles, unfortunately find themselves in a “Catch 22” situation. Table A articles do not contain a mechanism to appoint a director in the absence of quorum (the minimum number of directors that are required to make decisions on behalf of the company). Without a director or secretary with the authority to register the personal representative or beneficiary’s name in the company’s register of members, the company is effectively stuck in a vacuum. This is because the personal representative or beneficiary cannot exercise their right as shareholder until they are registered in the company’s register of members. Therefore, they are unable to pass a shareholder resolution to appoint a director or amend the articles.
In such circumstances it is necessary to apply to the court for an order to appoint a new director in order to bring the company out of this vacuum.
The position is very different for companies incorporated under the Companies Act 2006, with Model Articles. Model Articles permit the personal representative of the deceased shareholder to appoint a director to facilitate registration of their names in the register of shareholders, enabling the company to continue to operate.
If you are the sole director-shareholder of a company and the company’s articles of association have not been reviewed recently, we would recommend reviewing and updating them where appropriate.
Business Lasting Powers of Attorney
Business continuity may also be drastically affected if the sole director-shareholder becomes severely ill or incapable of carrying out his or her duties for whatever reason. A business lasting power of attorney (Business LPA) is a legal document that lets you (the ‘donor’) appoint one or more people (known as ‘attorneys’) to help you make decisions or to make decisions on your behalf.
By granting a Business LPA, a sole director-shareholder can appoint one or more attorneys to deal with their affairs including exercising their rights as shareholder of a company, either commencing immediately or upon them suffering mental incapacity. It is, however, essential that the company’s articles of association and the provisions of the Companies Act 2006 reviewed to ensure that the attorney does not unwittingly override or restrict the donor’s wishes.
As highlighted above, a directorship does not pass under their will/intestacy rules. It is a personal appointment and cannot be delegated to a third party by way of a power of attorney.
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700