What happens when a sole director dies?
When one person is the sole director and sole shareholder of a company there can be a number of issues which occur on their death or incapacity.
Sole directors carry with them all the power and legal authority to make decisions and take action on behalf of a company. When a sole director dies or loses mental capacity, all company assets are frozen until a new director is named; creditors and staff cannot be paid, and business operations are likely to be significantly curtailed.
Unless protocols are in place for a new director to succeed, executors and beneficiaries will need to seek grant of probate or letters of administration so that the deceased’s personal representatives (PRs) can apply to be added into the company’s register of members. However, this can take time and the business may suffer serious harm as a result.
Wills and succession planning essentials
Business governance: The Companies Act 2006 stipulates that all private limited companies in the UK must have certain legal documents in place, including articles of association and a memorandum of association. Articles of association set out specific conventions for how the company will be run and should include provision for the death of a director/shareholder, the circumstances which will lead to the appointment of a new director or directors, and the circumstances under which new shares would be created or existing shares disposed of.
Model Articles (the default articles of association for companies incorporated from 1 October 2009) stipulate that PRs are permitted to appoint a director.
If a company is operating under Table A articles (the default articles under the Companies Act 1985), it is advised that articles are updated as part of an ongoing succession plan.
When there are multiple shareholders, you may wish to agree a mechanism for your co-shareholders to buy your estate out. This requires careful drafting to preserve Business Property Relief where applicable. Business Property Relief, if applicable, would mean that you pay 0% Inheritance Tax on the value of your shareholding. This relief is easily lost if your agreement is poorly drafted.
Write a Will: All business owners and shareholders should create a Will and update it if their circumstances change. The Will should not contradict the articles of association in respect of the company and how succession should occur.
Set up Lasting Powers of Attorney: It is also advisable for a sole director to set up financial LPAs in case they lose mental capacity to make decisions in relation to their company for themselves. You can appoint a suitable businessperson as an executor purely for the management of the business (rather than personal financial decisions) through a bespoke document.
What could happen if a succession plan is not in place?
In 2020, the case of Williams & Others v Russell Price Farm Services highlighted the problems which can occur when no provision has been made for the transfer of assets on the death of a sole director and shareholder.
Russell Price had been the sole director and shareholder of his contract farm services company. On his death it was discovered that no provision had been made in the articles of association for Mr Price’s PRs to appoint a new director. As a result, access to the company bank account was frozen and the business was unable to carry out its fiscal obligations and day-to-day dealings.
Mr Price’s executors were forced to enter an urgent High Court application requesting that they be registered as company members so that a director could be appointed as soon as possible.
Thankfully, the court granted the order. However, the situation which put the business at risk could have been avoided if qualified succession planning had been carried out.
How can succession problems be avoided?
Sole directors and sole shareholders should ensure that the company’s articles of association provide for succession planning. The director’s Will should also name executors and be compatible with the company’s legal charter.
Clarity and legal expertise is required to ensure there is no conflict or omission which might jeopardise the smooth transfer of possession, access to bank accounts and appointment of directorial roles.
Wellers Law can help
Our expert solicitors can help you ensure that your Will and company legal documents are drafted correctly and that all issues relating to succession are addressed.
Alternatively, please call us for succession planning advice on 020 8464 4242 or email email@example.com to send us your enquiry.