Running A Business After The Only Director And Shareholder Has Died

Tony Granger highlights some important implications when a company’s only director and shareholder has died. 

A great proportion of the three million registered UK companies are sole director owner-managed businesses, formerly sole traders.

The death of the sole director and shareholder does not extinguish the company. It continues, rudderless. The main issues are as follows:

Timing is also an issue. The shares can only pass to heirs once the estate is wound up. The value of the business will surely deteriorate, and may only result in a ‘fire sale’ value. 

The biggest problem is how to appoint a new director to run the business. No party is legally able to run the business until a new director is appointed. The company is also in breach of its statutory obligations to have at least one natural director at all times. The personal representatives of the estate must have the power to appoint a new director. The position depends on when the company was incorporated.

The company’s articles (Table A) may or may not have been modified to allow personal representatives to appoint a director. If not, then either amend the Articles of Association to provide the personal representatives with the power to appoint a director where there are no other shareholders or directors, or the company may consider appointing a company secretary who can be given authority to register the transfer of shares.

In order to validly transfer the shares, a director needs to approve the registration within two months of the transfer instrument being lodged with the company. If there was a deceased sole director of the company, and if no other shareholders exist to appoint a new director, this approval is not readily obtainable. This is because the existing articles are the default articles applicable under the Companies Act 1985, and in such a situation, the personal representatives would be unable to transfer ownership without a court application for the appointment of a new director.

The two possibilities are that either the company has adopted the default Model Articles, or modified bespoke articles to allow personal representatives to appoint a director. Alternatively, it may be that the Company’s articles exclude the default Model Articles applicable to companies registered after 1 October 2009, and the applicable bespoke articles do not include a right for the personal representatives to appoint a director.

For a sole director/shareholder company business, check the Articles to ensure that personal representatives can appoint a director.

It is also important to note that personal representatives (executors) in the deceased’s estate become personally liable for taking on the company’s obligations, and will have to sign an indemnity from the company’s bank to this effect.

Make sure that you have a will, and ensure that your personal representatives are indemnified for actions taken on your behalf. 

The personal representatives, by virtue of the fact that the company shares vest in them until distributed, are able (as shareholders now in the company) to appoint a new director. However, the shares will have to be transferred to them to do so. Under Companies Act 2006, the standard position is set out in Article 17(2) of the Model Articles: ‘In any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director.’

Practical Tip:

Succession planning is vital for any business. Sole director/shareholder companies could enter into cross-option agreements with similar companies to ensure continuity after death, with value realisation of their shares. Plan now to avoid the risk of losing a valuable asset, and seek appropriate legal advice.