The risks of a Sole Director/Shareholder’s death – and how to prevent them
For companies with a sole director and shareholder, the death of that individual can create significant legal and operational difficulties. Without proper planning, the company may be left without anyone authorised to manage its affairs, leading to delays, uncertainty, and potential financial losses and business disruption.
Why is this a problem?
When a sole director/shareholder passes away, there is no one left with the authority to appoint a new director. Unlike companies with multiple directors, where remaining board members can continue operations, a sole director company is effectively paralysed. Urgent action is needed to ensure a new director is appointed as soon as possible.
What happens to the deceased shareholder’s shares?
When a shareholder dies, their shares do not automatically transfer to a new owner. The process depends on whether they had a valid Will:
- If there Is a valid Will
- The will appoints executors, also known as personal representatives (PRs). Executors appointed by a will have authority to deal with the deceased’s estate from death but often need to apply for a grant of representation (Grant of Probate).
- These PRs will eventually distribute the shares in line with the will.
- If there is no Will (Intestacy)
- No one has immediate authority to administer the deceased’s estate.
- The court must appoint administrators (also known as PRs) as established by the rules of intestacy, through a grant of representation (letters of administration).
- Until this is done, no one can deal with the shares.
Why can’t a new director be appointed immediately?
Even when personal representatives are appointed, their ability to appoint a new director depends on the company’s Articles of Association.
- If the Articles allow PRs to appoint a director, they can do so by written notice, ensuring business continuity.
- If the Articles do not permit PRs to appoint a director, the process becomes much more complicated.
PRs can only exercise shareholder rights, such as appointing a new director, if they are added to the company’s register of members. However, this registration can only be done by an existing director or company secretary.
- If there is no surviving director or secretary, PRs cannot be added to the register.
- Without being registered, PRs cannot vote the deceased shareholder’s shares to appoint a new director.
- PRs must wait until they obtain a grant of probate, which can take months.
During this time, the company has no director, meaning:
- Salaries and supplier payments cannot be processed.
- The company cannot enter into contracts.
- Business operations may come to a halt.
Legal solution: applying to court
If PRs are unable to be registered as members of the company and appoint a new director, they can apply to the court under Section 125 of the Companies Act 2006 for rectification of the register. However, this process is costly, time-consuming, and disruptive to the business.
How to prevent this problem
The easiest solution is to ensure that the sole director and shareholder has a valid will, and the company’s Articles of Association contain provisions allowing PRs to appoint a new director without needing to be registered as members.
By taking this simple step, sole director/shareholders can protect their business from unnecessary delays, legal costs, and operational shutdowns in the event of their death.
If you are a sole director/shareholder, it is strongly recommended to ensure that you review your company’s Articles of Association and estate planning arrangements. Our experts from the Corporate and Wills, Probate & Lifetime Planning departments have extensive experience and can provide tailored solutions to safeguard your company’s future.
