04.08.2017

Court case highlights the risks of sole shareholder-directors

A recent court case has emphasised the potential dangers to a company in having a sole shareholder-director and is a timely reminder of the need to put in place proper succession planning for all businesses.  Were it not for the swift intervention of the court a thriving business could have failed following the death of its owner.

Last will and testament with pen and reading glasses.

On 28th February 2017, Mr Eric Pilling, the sole shareholder and director of Lancashire Cleaning Services Limited, died.  Without a surviving director or company secretary the company was unable to function properly and the executors could not be entered in the register of members and so had no legal authority to appoint a new director.  The situation was made even more precarious when the company’s bank account was frozen on 7th April by NatWest after learning about Mr Pilling’s death, meaning the business was unable to pay employee wages, due on 13th April, and other creditors.

The Model Articles under the Companies Act 2006 (“the Act”) have provisions which allow personal representatives to appoint a person to be a director.  Unfortunately, Lancashire Cleaning Services Limited was incorporated with older Articles under the Companies Act 1985, which had no such provisions.  In these circumstances the only course of action was to apply to the court under section 125 of the Act to rectify the register of members by replacing the deceased shareholder’s name with the names of the executors.

Owing to the urgency of the situation an emergency application was made to the High Court on 11th April asking it to use its statutory powers to enter the names of the executors in the register of members.  This would then allow the executors to pass a resolution appointing a new director.  Unusually, the application was made before the grant of probate as any delay would potentially affect the survival of the company and the interests of its employees.

On 12th April the court granted the order to rectify the register of members.  As result, a new director was appointed by the executors, the company survived, and it was successfully sold to a third party.

It is worth bearing in mind that the application to the court was only possible because the executors derived their title to the shares under the will from the date of death.  If Mr Pilling had died intestate his personal representatives’ authority would come from a grant of representation only once this is issued, by which time the business may have failed.

All sole shareholder-directors should check that their company’s Articles of Association are up to date and contain provisions to enable the business to continue trading and for personal representatives to act in the event of death.

For further information about this subject please contact:

Simon Chapman

E: simon.chapman@burgisbullock.com

T: 07831 255302

 

Five Ways to Bring in More Cash for Your Business

Now is the perfect time to evaluate your financial position and come up with innovative ways to add revenue streams and generate cash. Here are five ways you might consider to improve your cash inflow... - read more