Who would own a business?
Every year about 500,000 new companies and partnerships are created in the UK and that doesn’t even cover all the sole traders who crack on alone making a living. It’s great we are so entrepreneurial, and we will always try to help fellow business-people out if we can. Sadly though, accidents happen and problems can quickly occur.
When a sole shareholder who is also the sole director of a company dies, serious problems can arise…
If a company has a number of directors and one of them dies, the remaining directors can manage the company of course. If a company's sole shareholder dies, the directors can continue to manage the company until the shares are transferred to the deceased shareholder's beneficiaries. But what if…
a sole director is also the sole shareholder…
…then there is uncertainty. In this case, the deceased's personal representatives must obtain a Grant of Probate or Letters ofAdministration in order to be added to the company's register of members. The personal representatives can then vote to appoint a new director. This takes time, and the process can be detrimental to the business. Assets in the company's name will effectively be frozen because no one in the company has the authority to make decisions. This could lead to the company failing to pay creditors or even collapse if no one is in a position to make decisions or even access the bank account and banks will not take instructions from anyone other than an authorised director that they have KYC for on file.
The articles of association of a company, which are filed with Companies House and outline the rights attached to shares, then come in to play. They specify what should happen if a shareholder or director of the company dies. It is critical that the articles of association are reviewed on a regular basis to ensure that they adequately provide for the future and cover what should happen in the event of death.
The position is clear if the company in question has adopted the most recent model articles of association (those that all companies incorporated on or after 28 April 2013 are automatically incorporated with). In the event that the company has no shareholders and no directors as a result of death, Article 17(2) allows the personal representatives of the last shareholder to have died to appoint a person to be a director. If the company has adopted bespoke articles, these must be checked to ensure that this situation is covered. In any case, if the deceased did not leave a valid will in which executors were named, it is necessary to wait for a grant to confirm the appointment of personal representatives. This can take some time and can be problematic if a director is required to act quickly.
Any business owner or shareholder should also have an up-to-date will that specifies what should happen to their shares if they die.They should ensure that the will is in accordance with the company's articles of incorporation so that there is no conflict or confusion. It is worth noting that articles frequently include provisions that treat a shareholder's death asa "event of default," triggering the automatic offering up for sale of the shareholder's shares in the company - to the company and/or the remaining shareholders, often at market value. This type of provision is less likely to appear in the articles of incorporation of a company with only one director and one shareholder, but it may remain in the articles for historical reasons.
Professional advice should be sought when updating your will, as the natural tendency is to leave company shares to family members, some of whom may not want to be involved (or may lack the necessary skills) in the business. In these cases, they may prefer cash to shares, and appropriate mechanisms can be put in place to provide for this in a straightforward and tax-efficient manner. Always make sure that your will and the constitutional documents of the company you run (as well as any companies in which you have shares for that matter) complement each other and do not contradict each other.
Basic practical measures, such as ensuring that key company knowledge and information is not solely held by one person in the business, should not be overlooked when planning for the future of a business. Ensuring that at least one other person in the company has access to key know-how, contacts, passwords, and the authority to make daily payments can assist the business in continuing to operate after the death of a key person.
In the long run, succession planning should be considered in the context of both your professional and personal lives. The appointment of an additional director at a suitable time during your lifetime will alleviate many of the issues caused by the death of a sole director and shareholder.
Many business owners work extremely hard to build a successful company. Planning ahead of time will ensure that the company can continue to operate even if the worst were to happen. We cannot recommend enough that you spend some time on this because you can really affect your family if this goes wrong. What do any of them really know about your company? Enough not to get sued?