What happens on the death or incapacity of a sole director and shareholder?
13 November 2023
Business owners often envisage their new venture as a lasting legacy for future generations. However, they are often too caught up dealing with the day-to-day running of the business to consider what would happen on their death or incapacity.
With a sole director and shareholder, all of the power and legal authority to make decisions on behalf of the company rests with one individual. On their death or incapacity, the company’s assets are effectively frozen until a new director is appointed, with business operations paralysed.
When a sole director and shareholder dies, there are two main issues to be considered:
- Who will their shares be transferred to?
- How will a new director be appointed?
Death of a sole director and shareholder
Where a company was incorporated before the implementation of the Companies Act 2006, the director’s executors have to submit an application to court requesting that they be registered as shareholders, in order that a new director can be appointed. The procedure can be costly and slow and in the meantime the business cannot trade, with potentially catastrophic consequences for the business.
A sole director and shareholder should consider appointing an additional director to act with them as co-director. However, this would then dilute their power and control of the company, and there may be tension if the co-director has a different vision for the business.
This is generally not an issue for a company incorporated after the implementation of the Companies Act 2006, as in that case the executors can appoint a new director. This avoids a protracted court application and means that the business can operate as normal.
Companies with bespoke Articles of Association require a careful review of their Articles of Association. It is important that a sole director and shareholder has a valid Will in place and that it is consistent with the company’s Articles of Association, including with regard to the transfer of shares on death.
In the 2020 case of Williams & Others v Russell Price Farm Services, Mr Price had been the sole director and shareholder of his contract farm services company. No provision had been made in the Articles of Association for his executors to appoint a new director on his death. On his death, his executors had to file an urgent application with the High Court to enable a new director to be appointed as soon as possible, otherwise, the business would not have survived.
Loss of mental capacity
If the director is also the sole shareholder, the company effectively becomes paralysed on their incapacity. If they have not made a Lasting Power of Attorney covering financial decisions, it is necessary to file an application with the Court of Protection for the appointment of a deputy to act on their behalf. The process is expensive and slow, and in the meantime the business is unable to carry out its day-to-day dealings, including paying suppliers and employees. There is no certainty that the Court of Protection will choose someone that the business owner would have chosen.
A solution is to put in place a Lasting Power of Attorney covering financial decisions, which gives trusted individuals (the attorneys) the ability to manage the business owner’s affairs, including exercising shareholder rights. The scope of the Lasting Power of Attorney could be limited to the business (a “Business LPA”), with a separate Lasting Power of Attorney covering their personal financial assets. In this way, they can appoint different attorneys in relation to their business assets, as opposed to their personal assets where it might be appropriate to appoint the spouse, civil partner or other family members.
Business continuity may be drastically impacted if the sole director and shareholder dies or becomes mentally incapable. The company’s Articles of Association should be reviewed so as to confirm that, on death, the executors have the power to appoint a new director, and sole directors should consider putting in place a Business LPA in case they are mentally incapacitated in the future.
We at Birketts can provide a joined-up approach for business owners looking to put in place the necessary safeguards to protect the continuity of the business should the worst happen
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Katherine Forster
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2023.