Last Man Standing

What would happen if a sole director shareholder were to pass away? What would happen with the shares? Who would gain control of the company? These are all questions that need to be answered for anyone who is the sole director shareholder of a business.

The good news is that if your company was formed recently, or under the new regime implemented by the Companies Act 2006 then the answer is simple.

The person who you have entrusted to deal with your estate, or a personal representative if you died without making a will, would have the power under article 17(2) of your company’s articles of association (presuming you have used the model articles) to appoint a director to be able to carry on the day to day running of the business. This may be essential if you have a profitable business or employees to pay, as there is a good chance that on the death of a sole director the bank would freeze your bank account until there is a director appointed and registered at Companies House.

The problem arises when or if a sole director shareholder passes away and the company was formed under the old legislation using the standard articles for a company incorporated at that time (pre-Companies Act 2006). It is a principle of company law that a person is only entitled to be recognised as a shareholder when their name is entered into the company’s register of members; this usually requires the approval of the directors. Therefore one would find themselves in a ‘Catch 22’ situation, as the shareholder would have to vote and use its power to appoint a director but cannot do so until they are in the register of members, which generally only a director can update.

If the only director has passed away, then where does this leave the estate?

The unfortunate answer is that it leaves a vacuum in the company that makes it difficult to move forward from. There would have to be a s125 application (under the Companies Act 2006) made to the court to get the court to amend the register.

There is case law on this point Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited [2017] EWHC 1096.

In this case the deceased was also a sole director/shareholder but the company had carried on trading and had employee’s working after the deceased had passed away. The bank account was frozen meaning suppliers and employees could not be paid and a grant of probate had not yet been obtained. The possible executors made a s125 application to court to rectify the register and usually while the court would not seek to get involved, they noted that this case had ‘exceptional circumstances’ and would only get involved if there were ‘exceptional circumstances’.

Under s125(2) Companies Act 2006 the court can refuse an application (if they want) and under s125(3) Companies Act 2006 the court can decide any question ‘relating to the title of a person who is a party to the application to have his name entered in or omitted from the register… and generally may decide any question necessary or expedient to be decided for rectification of the register’. So as you can see it is not always guaranteed that the court will rectify.

About the author

Raj Singh is a solicitor in the corporate department at our Chesterfield office.

For more advice on this topic or related matters:

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