Court decision highlights risk for sole shareholder-directors
Author: Iain Butler and Jessica Berkeley
Applies to: England and Wales
The High Court has made an exceptional ruling, highlighting the difficulties that a company with Table A articles can face upon the death of a sole shareholder-director.
When a sole shareholder-director dies, the personal representatives face the immediate need to appoint a new director to manage the company and to register the transfer of the deceased's shares.
Private companies which have adopted the default Model Articles under the Companies Act 2006 (the Act) will already have provisions in their articles which allow the personal representatives to appoint a person to be director (subject to certain conditions).
However, for companies which have adopted earlier 'default' models from the Companies (Tables A-F) (Amendment) Regulations 1985 (Table A), their articles will not contain such a provision. This means there is a risk that the personal representatives will be unable to secure the appointment of a new director and entry of their own names on the Company's register of members in place of the deceased. This is despite regulations 29 to 31 of Table A confirming that title to the deceased's shares has passed, by operation of law, to the personal representatives.
In such circumstances, it may be necessary to apply to the court for an order pursuant to section 125 of the Act to rectify the register of members by removing the deceased's name and replacing it with the names of the personal representatives.
The High Court case of Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited 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.
E was the sole shareholder and director of Lancashire Cleaning Services Limited (the Company). Upon his death there was no surviving director or secretary, although the Company continued to trade. His personal representatives (PRs) intended to appoint a director to take control of the Company but there was simply no provision within the articles which would permit the personal representatives to appoint a director where, as a result of death, the company had no shareholders or directors. The PRs were therefore unable to secure, by themselves, their entry on the register of members, which would allow them to pass a written resolution and appoint a new director.
The need for the urgent application came about when the Company's bankers froze the Company's accounts and, consequently, its prospects of survival were damaged.
The PRs application was successful. The court was satisfied that it had the necessary power under section 125(2) of the Act to order rectification of the register and ordered that the PRs make the necessary entries on the Company's register of members immediately, as there was no officer of the Company who was in a position to do so.
It was noted that the imminent failure to be able to draw sufficient funds to pay wages and salaries to employees and to account for unpaid VAT due to HMRC made it inappropriate for the Company to wait until a grant of probate was obtained.
The absence of a provision in a company's articles permitting personal representatives to appoint a director leaves sole shareholder-director companies vulnerable.
HHJ Hodge QC commented that, in the circumstances of the case, the Company had been left completely directionless, with no officer capable of acting on its behalf. Whilst it was noted that normally a company should await the grant of probate, any delay in this particular case would have meant there would have been a high risk of staff leaving, of contracts being lost and of the business being irreparably damaged.
The difficulties highlighted by the exceptional circumstances of this case are only applicable for companies with unmodified articles based on Table A and bespoke articles which do not cover the point.
It is therefore important for companies who have a sole shareholder-director to revisit their articles and ensure that they include appropriate provisions (such as article 17(2) of the Model Articles) to enable continuity of management in the event of the death of a sole shareholder-director. Such provisions can ensure a company's survival during a difficult period of change.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.