Sole shareholder-directors: issues for the personal representative
Court case means you may wish to revisit and revise your articles.
One year ago a High Court ruling highlighted the difficulties that a company with Table A articles can face upon the death of a sole shareholder-director. Where a sole shareholder-director dies, the personal representatives are likely to need to appoint a new director to manage the company and to register the transfer of the deceased's shares.
Those who have adopted default model articles under the Companies Act 2006 should, if unaltered, have these provisions in their articles. The following is the provision included in the model articles, which allows a personal representative to appoint a person to be a director:
17. Methods of appointing directors
(2) 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.
(3) For the purposes of paragraph (2), where two or more shareholders die in circumstances rendering it uncertain who was the last to die, a younger shareholder is deemed to have survived an older shareholder.
The issue companies face is that some will be using earlier 'default' model articles, for example Table A from the Companies Act 1985. This and other model tables do not contain such a provision. This will mean that the personal representatives will be unable to appoint a new director.
The High Court case of Kings Court Trust Limited & Ors v Lancashire Cleaning ServicesLimited considered whether the court was able to exercise its power under section 125 of the Act to order rectification of the register of members following the death of a sole shareholder-director, where the company had adopted articles based on Table A.
The sole shareholder and director died and the company continued to trade. The personal representatives were unable to appoint a director to take control of the company as there was no provision within the articles which would permit the personal representatives to appoint a director. The company's bankers, as is common with these types of cases, froze the company's bank accounts.
The judge stated ‘In my judgement, in the exceptional circumstances of this case, it does seem to me that unnecessary delay is taking place in entering the names of the named executors on the company's register of members. The company is presently completely directionless, with no officer capable of acting on its behalf. It is only the court that can rectify that situation by ordering rectification of the register. Normally the company should await the grant of probate; but, in this case, it may be too late for the company if it does… In the circumstances of this case, which I repeat are wholly exceptional, and in order to ensure the survival of the company, I am satisfied that the court can and should exercise its power under section 125 of the 2006 Act to order rectification of the register.’
Clearly, the judgement was beneficial but the cost of the delay and potential loss of business highlights that sole shareholder-directors may wish to revisit the articles and if operating under Table A or similar may wish to revise these articles.