Company Succession Planning: Death of a sole director – now what?

16 June 2020

Company succession planning is critical to ensure that a company can continue to run in the unfortunate event that a director (or shareholder) dies. If there are other surviving directors, they are able to step in and run the company, but what happens when a sole company director dies?
 

We have previously discussed this issue in previous blogs entitled; death of a sole director and shareholder and no man is an island but being a sole director might come close.

What happens when company succession planning is not undertaken?

The recent case of Williams v Russell Price Farm Services, 2020 EWHC 1088 Ch is a timely reminder of what happens if company succession planning is not undertaken. In the event of the death of a director, if there are other surviving directors, they will often be able to step in and run the company. If the sole shareholder of a company dies, the directors can continue to manage the company until the deceased shareholder’s beneficiaries have the shares transferred to them. 

However, without adequate company succession planning, difficulties may arise when a sole director who is also the sole shareholder dies. In these circumstances two key issues arise for the personal representatives of the deceased’s estate:

  1. The immediate need to appoint a new director to ensure continuity of the company; and
  2. Dealing with the transfer of the deceased’s shares in the company. The personal representatives may, subject to the company’s articles of association, choose either to become the holder of those shares or to have them transferred to another person, i.e. the beneficiaries.

Obtaining Probate

Both of these steps above involve obtaining Probate. Probate is a general term used to describe the legal and financial processes involved in dealing with the property, money and possessions (i.e. the ‘estate’) of a person who has died. This involves obtaining either a Grant of Probate or Letters of Administration. Probate is required in order for the personal representatives to be entered into the company’s register of members. The personal representatives then have the ability to pass a resolution appointing a new director.

Issues with obtaining Probate

Obtaining Probate can take a number of weeks during which the company will be unable to carry on business as usual. As a result, any delay caused by the need to apply for Probate can cause significant problems for the business. For example, whilst there is no director in office, assets in the name of your company cannot be accessed, contracts cannot be entered into, supplier and employees cannot be paid and other key decisions cannot be made. Clearly, this could have a substantial impact on the business you have worked hard to build.

The recent High Court case of Williams v Russell Price Farm Services provides a real life example of such a situation. The late Russell Price was the sole director and shareholder of his contract farming company. There was no provision in the company's articles of association for the personal representatives to appoint a director - only shareholders could appoint a director. This left the company in a precarious position as it was unable to operate its bank account and therefore could not pay its creditors or carry out day to day business transactions. As a result, the executors of his estate made an urgent application to the High Court requesting that they be entered into the company’s register of members so that they could appoint a director without waiting for the Grant of Probate to be obtained.

In Williams v Russell Price Farm Services the court granted the order sought by the executors but the need to apply to court may be avoided with suitable company succession planning.

When can the personal representatives of a deceased’s estate appoint a director without the need to obtain a Grant of Probate or apply to court?

If a company has adopted Model Articles as its articles of association (the default articles of association for companies incorporated from 1 October 2009), the position is clear. If, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died can appoint a person to be a director.

However, if you do not have a valid Will in which executors are properly appointed, Probate will be needed to confirm the appointment of the personal representatives, in which case you are back to square one. Therefore, it is also necessary to ensure that you have a Will which properly appoints executors.

For companies incorporated prior to 1 October 2009, assuming that the company has not adopted bespoke articles of association, there is no equivalent provision. This means that either Probate is needed or the personal representatives of the deceased need to apply to court before a director can be appointed.

If a company has adopted bespoke articles of association, the position will depend on what those articles say. If there is no provision for the personal representative to appoint a director then a court order may be required.

No one wants to contemplate their own mortality, but for a sole director this may be one of the most important considerations that you can make. Company succession planning is essential to ensuring that a company can continue to function on the death of a sole director. Not only should you ensure that you have articles of association which provide for succession planning but any Will you have prepared should properly appoint executors and work alongside any company constitutional documents to avoid your company and your estate being exposed to a period of uncertainty and unnecessary costs.

Further information

For further information on the issues raised in this blog, please contact a member of our private client or corporate and commercial teams.

 

About the authors

Diva Shah is an associate in our Private Client team. Diva acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity on a broad range of matters.

Luke Gregory is an Associate in the Corporate and Commercial team, he works on a broad range of corporate and commercial matters including advising on company incorporation, bespoke articles of association and shareholder agreements, corporate governance, and Companies Act procedures such as off-market share buybacks and the removal of company directors.

 

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