Case law: Companies with sole shareholder-directors should review articles in case their death stops company functioning
Companies should review their articles to ensure that the death of a shareholder-director won't leave them without either owners or directors. If it will, they should amend the articles, as the court has confirmed it will exercise its discretion to rectify a company's register of shareholders to resolve the situation only in exceptional circumstances.
This update was published in Legal Alert - August 2017
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When a sole director-shareholder of a company dies, a catch-22 situation can arise. The law says that the voting rights of their shares are suspended after the shareholder's death, unless and until the deceased's personal representatives (executors if they left a will, or administrators if there was no will) transfer the deceased's shares to new owners, or elect to be registered as shareholders themselves. Articles often refer to the personal representatives of the deceased shareholder as 'transmittees'.
In any event, executors must obtain a grant of probate from the court (administrators must obtain letters of administration if there is no will) before they can ask the directors to approve a transfer or election.
However, companies' articles of association often say that no such transfer or election can take effect unless approved by the directors, even if the personal representatives have obtained a grant of probate or letters of administration.
In the case of a deceased sole director-shareholder, that approval will be impossible to obtain. The shareholders are unable to elect a new director to approve the transfer or election because the deceased's shares carry no votes until the transfer or election is approved.
Newer companies whose articles incorporate the 'model form' articles prescribed by company law in 2006 do not have this problem, as their articles will allow personal representatives to appoint a new director by serving a notice on the company - no shareholders' meeting is required. The new director can then approve the relevant transfer or election.
However, older companies' articles rarely contain such a provision. Whilst such companies can alter their articles to include a provision similar to that in the model form articles, they have very few options if they fail to do so, and the sole director-shareholder dies.
One option is to ask the court to 'rectify' the company's shareholder register under company law, and apply for an order that the personal representatives are registered as the new owners of the deceased's shares without directors' approval. However, the court's power to rectify a company's register of shareholders is discretionary.
In a recent case, a sole shareholder-director died. The company continued to trade after the death, but when the company's bank realised what had happened, it froze the company's accounts. This meant that the company was unable to pay its employees, or pay outstanding VAT to HM Revenue and Customs.
In the circumstances, the court agreed that the register should be rectified to include the names of the executors as new shareholders of the company in their own right and (there being no officer of the company authorised to do so) instructed them to make the necessary entries in the register themselves.
The urgency of the situation was, in the court's view, enough to warrant ordering a rectification of the register, even though the executors had not yet obtained a grant of probate. It noted that if it had delayed, the risk of staff leaving, of contracts being lost and of the business being irreparably damaged was high. However, it stressed that it was only ordering rectification because of the 'exceptional circumstances' of the case.
While it is less likely, the same situation could arise if there are two director-shareholders, such as two spouses, and they die at the same time.
- Companies should review their articles to ensure the company does not suffer if a sole director-shareholder dies, leaving it without either owners or directors. Otherwise, they need to make changes to the articles, as the court has confirmed it will exercise its discretion to rectify a company's register of shareholders to resolve the situation only in exceptional circumstances
Case ref: Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited  EWHC 1096
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.
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