By failing to prepare, you are preparing to fail – a word of warning for sole directors/shareholders

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Home > Knowledge Hub > By failing to prepare, you are preparing to fail – a word of warning for sole directors/shareholders

No one likes thinking about bad things happening. If you are a sole shareholder and director however, it is vital that your Articles of Association are suitably drafted to avoid corporate catastrophe in the event of your death.

The risk a sole shareholder/ director faces

Shareholders have the power to appoint directors who, in turn, are responsible for the day-to-day management of a company. However, when both these positions are solely occupied by a single person, that person’s death can leave the company with (i) no one left to manage the company’s affairs, (ii) no one left to appoint a successor director and (iii) no one left to register the transmittee (or any third party) as the registered holder of shares.

This could leave the company in a corporate vacuum, meaning it risks having its assets frozen; being unable to pay employees and creditors and unable to authorise transactions essential to business continuity.

When you can relax

If the company was incorporated under the Companies Act 2006 (CA06) and elected to adopt the Model Articles then there is no cause for concern. This is because:

  • Model Article 17(2) (MA17(2)) anticipates this exact scenario, providing that where the sole shareholder/ director dies, their personal representative (PR) has the right to appoint another director; and
  • Model Article 27 entitles the PR to be entered into the register of members (which requires the approval of the board of directors).

Where danger lies

If, however, a company was incorporated before CA06 (which came into force in 2008) and adopted the Table A provisions (the standard set of Articles prior to 2008), a sole shareholder/ director must proceed with great caution. This is because the Table A provisions do not give power to the PR of a deceased shareholder to appoint a successor director, which means that the PR cannot be entered into the register of members as the legal holder of the shares.

Issues may also arise if a company adopted bespoke articles (either before or after CA06 came into force) – such articles should be checked to ensure that they contain an “MA17(2) equivalent” provision (or similar), otherwise these companies will also be stuck without a director or legal holder of the shares.

In the absence of such provisions, the PR will need to apply to the court to amend the register of members (so that the PR is the legal holder of the shares) before the PR can appoint a new director by passing a resolution. Obtaining a Grant of Probate can be a protracted process and that is without the need to apply to the court to amend the register of members of the company. By the time Grant of Probate and the additional court application has been dealt with, the company might have already spiralled into disaster.

A possible escape

The case of Ellott v Cimarron UK Ltd showed that the courts are willing, using their power under s125 CA06, to enter a PR into the register of members before a grant of probate is obtained. In the Ellott case however, such relief was only granted because the company was faced with “unacceptable jeopardy”. With the wide discretion judges have under s125, a similar outcome cannot be guaranteed so it would be unwise to rely on such relief.

Best course of action

One possible solution here would be for you, as sole director, to appoint another director so that in the event of your death there will still be someone to take decisions on behalf of the Company. However, we realise that this might not be commercially viable for you and that in the event of your death (or theirs), the problem will re-emerge.

The best course of action is therefore to check your Articles to ensure they contain provisions that allows for your PR to appoint a director in the event of your death. If they do not, your Articles will need to be amended accordingly, by way of special resolution.

At the same time, it might be worth reviewing your will to ensure your PR is someone you feel comfortable making this important decision.

How we can help

Should you wish to discuss any corporate matters, including reviewing and amending articles of association please do not hesitate to contact our Corporate & Commercial Department. Simultaneously or alternatively, if you require assistance in preparing or altering your will, please contact our Private Client Department.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.

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