Risky Business – The Death of a Sole Shareholder-Director

The recent 2017 case of Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited has highlighted an important risk faced by certain companies that have sole shareholder-directors.

A private limited company has separate legal personality and is permitted to have the same individual as both its sole director and sole shareholder. Moreover, there is no requirement for a private company to have a company secretary. Put simply, this leads to all of the company’s legal authority and power to make decisions resting squarely on the shoulders of one individual and, should that individual die, the company risks leaving itself in a very vulnerable position.

Facts

In the 2017 High Court case, the sole shareholder-director of Lancashire Cleaning Services Limited died and left behind no surviving director or secretary. Nevertheless, the company continued to trade. That was until the bank discovered the death and froze the company’s accounts, resulting in not only the company being unable to settle an outstanding VAT bill but also the company being unable to pay its employees.

The personal representatives (PRs) of the deceased sole shareholder-director had every intention of appointing a new director to take control of the company but it turned out not to be a simple task.

The company in question was incorporated under the Companies Act 1985 and had adopted articles based on Table A which meant that until the PRs are registered as the shareholders of the company they could not act in that capacity. The articles did not, however, specifically allow the PRs (or, indeed, any other person) to appoint a director who could then register the PRs as owners of the shares.  In summary, with no director or secretary to register the PRs or beneficiary’s name in the company’s register of members, Lancashire Cleaning Services Limited was stuck in corporate limbo.

The result was an urgent application to the court requesting that it exercises its power under section 125 of the Companies Act 2006 to rectify the company’s register of members, specifically, to include the PRs as the new shareholders.

Decision

In this particular case, the PRs’ application was successful and the court exercised its discretion. As a result, the PRs’ names were entered in the company’s register of members meaning that they could then exercise their powers as shareholders including the power to appoint directors.

Comment

It is crucial to note that the outcome of this case was atypical and that the ruling does not set a precedent. Indeed, the court made clear that it would only exercise its discretion to rectify the register of members in “exceptional cases”.

What set this particular case apart was the requirement for urgent action as Lancashire Cleaning Services Limited was at risk of losing contracts, having staff leave and its reputation being harmed beyond repair. Given the urgency of the situation, the court felt it inappropriate for the company to have to wait until it had obtained a grant of probate.

Companies that have a sole shareholder-director and have unamended articles based on Table A or bespoke articles that do not cover this situation are at risk of remaining in limbo on the death of that sole shareholder-director until a grant of probate (which can be a lengthy process) as the court’s discretion may not always be exercised.

It is recommended that such companies amend their articles to include suitable provisions to allow the company’s management to continue following the death of the sole shareholder-director.

For further information, please contact Giao Pacey on 020 7874 5620

Alastair Fatemi, Trainee Solicitor, Simkins LLP