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What happens when a sole director and shareholder dies?

What happens when a sole director and shareholder dies?

What happens when a sole director and shareholder dies?

It is not uncommon for one person to be the sole director and shareholder of a company. If this individual dies, difficulties can arise in relation to the management of the company until the shares are transferred to the deceased’s heirs.  The sole director’s appointment as director will terminate and the business of the company is likely to be interrupted as there will be no-one with authority to make decisions on behalf of the company. If they have not planned ahead, there may be no-one to appoint a new director or to update the register of members to reflect the new ownership of the shares.

I will consider the shareholder and director positions in turn.

Shareholder Position

Transmission of the shares

If the shareholder dies leaving a valid will appointing executors, the administrators become the personal representatives (“PRs”) when the grant of probate is issued.  Where the shares were registered in the deceased’s name, the legal title vests in the PR automatically.

Where there is no valid will or the will does not appoint executors, no-one has authority to administer the estate until they have a grant of representation constituting them as PRs. Shares cannot vest in the administrators until the grant.

Once it is established that either the executors or administrators have authority, the company’s articles should be checked to determine how the PR can be registered as a member.

Rights of the PR before the grant

Unless the company’s articles provide otherwise, PRs will have the right to request the company to formally register them as holders of the shares.  However, the company’s articles will generally require the PRs to prove their entitlement to the deceased’s shares. The PRs are unlikely to be able to provide evidence (and therefore be able to register as members) prior to the grant.

Rights of the PR after the grant

A transmittee may transfer the shares to another person without being registered as a member themselves (subject to any restrictions in the company’s articles e.g. pre-emption rights).

The articles may allow the PRs to register the deceased’s shares in their own name or transfer the deceased’s shares to another person.

Director Position

A company must have at least one director, one of whom must be a natural person.  The best-case scenario is that the articles allow the PRs to appoint a new director.  If a Company was incorporated under the Companies Act 2006 and has model articles, the deceased’s PRs will have this authority.

If the articles of association do not permit the deceased shareholder’s PRs to appoint a new director, the process of appointing a director can be complicated. Where a company has adopted Table A articles for example, the articles do not allow the PRs to appoint a new director. This makes it difficult to register new members. Under the Companies Act, members are not recognised as the legal owner of shares until they are entered onto the register of members. If there is no surviving director, the register of members cannot be updated (even if the articles entitle the PRs to be registered as members).

A possible solution is for the executors to apply under Section 125 of the Companies Act for rectification of the register of members.  In Ellott v Cimarron UK Ltd, the court granted an order to replace the deceased sole member (who was also a sole director) with the executor named in his will, prior to obtaining probate.  The court considered that the potential risk to the company arising from its inability to trade justified the order.

How we can help – Speak to our Corporate & Commercial Specialists

Applying for a court order as outlined above can be time consuming and expensive, and the need to do so can be avoided with careful planning.  If you are the sole director and shareholder of a company it is essential to review and, if necessary, update your company’s articles of association to provide for the PR of a deceased shareholder to appoint a new director in the event that, as a result of death, the company has no shareholders or directors.

Our corporate and commercial team would be happy to assist. Please contact us on 0330 175 7609 or email enquiries@ibblaw.co.uk. Alternatively, contact us via the enquiry form at the top of our Corporate and Commercial page.