Succession Planning: Sole Director / Shareholder Companies

What happens when a sole director and shareholder of a company dies?

The short answer is: this will depend on what the company’s Articles of Association say. Hopefully, the Articles will deal with the issue.  If not, then this can cause unnecessary difficulties.

When a shareholder dies their shares usually pass by transmission to their personal representatives (PRs).

If the Articles don’t allow the PR’s to appoint a director this can lead to a catch 22 situation because the company will then have no directors and no members.

The members of the company have the power to appoint directors. A person becomes a member of a company when their name is written in the company’s Register of Members.  However, if the company has no directors (and no company secretary) there is no one with authority to write up the company’s Register of Members.  This leads to a circular problem.  There are no directors to write up the Register of Members which means that there are no members to appoint new directors. The situation appears to be intractable.

If there are no directors, then this can have catastrophic consequences for the operation of the company because there will be no one with authority to operate its bank accounts or pay its employees, suppliers and creditors.

Where there is no power in the articles for PRs to appoint directors, the PRs may have to apply for a Court Order to allow them to write up the company’s Register of Members.  This is known as a Section 125 Application.  Such an Order is discretionary, in other words, there is no guarantee that it will be granted.  Although, if the application is properly made on appropriate grounds, the Court is unlikely to impede regularising the position and such Orders have been made as a matter of urgency where it appeared the company would imminently fail if it remained without directors.

Thankfully, the current Model Articles do allow PRs to appoint directors. However, if you are a sole director and shareholder and your company was incorporated before October 2009 it would be prudent to review your company’s Articles of Association to ascertain whether they deal with the issue.

Please contact Victoria Spellman ([email protected]; 01473 611 211) for further information and assistance.