Matthew Biles Partner, Head of Department, Private Client & Tax
Entrepreneurs and private wealth: will your company be able to remain operational if you die?
A recent legal case in the UK has brought into sharp focus a key consideration that entrepreneurs and other business owners/managers should bear in mind. If you are a sole director and sole shareholder of your company then this can cause significant problems at your death if no planning has been undertaken to anticipate the potential complications.
In the recent case of Williams and Others v Russell Price Farm Services Ltd , Mr Price had died in March 2020 as the sole director and shareholder of Russell Price Farm Services Limited (the Company).
By law, upon Mr Price’s death, the shares in the Company were passed to his executors to administer and then distribute as per the terms of his Will. However, the Company was left with no director(s) to register the executors or the beneficiaries as holders of the shares and the articles of association of the Company did not provide for Mr Price’s executors to appoint a director of the Company.
In this situation, executors are left with no option but to make a complex and costly application to the Courts, at the expense of the estate, for an order of the Court that the register of members/shareholders of the company be rectified to recognise the executors as shareholders of the Company. The shareholders of the company in question are then able to appoint directors.
In the case of the Company, the situation was compounded because, without a director, the Company could not function on a day-to-day basis and was at risk of failing. The executors, therefore, had no alternative but to apply to Court before they had obtained the Grant of Probate, a normal prerequisite for an application of this type. The executors had, therefore, to give inter alia undertakings to the Court to apply for probate as soon as possible and to pay all necessary taxes as required.
Practical considerations for entrepreneurs and sole directors/shareholders
Applications to Court for an order that a register of members/shareholders be rectified are expensive and time-consuming. Furthermore for a trading company with obligations and liabilities, such as Russell Price Farm Services Limited, any delay in for example paying creditors or employees can put the company at risk of failing. It is therefore vital that entrepreneurs take appropriate steps during their lifetimes to both ensure that a situation does not arise where at their death a company is left with no directors and no shareholders but also to consider succession planning more generally. Such steps could involve appointing co-directors, giving away shares to another person or even a family trust or ensuring that the company’s articles of association allow a new director to be appointed by the executors upon the death of the sole shareholder and director. The model articles for private companies limited by shares incorporated under the Companies Act 2006 provide for executors to appoint directors. Model articles of association for companies incorporated before the Companies Act 2006 came into force (known as Table A articles) do not, unless amended, contain such provisions.
Each of these options needs to be considered on a case by case basis to ensure, amongst other things, that:
- The legal formalities are correctly followed to ensure that there are no post-death challenges by any disgruntled persons;
- The relevant tax implications are properly taken into account;
- The founder of the business maintains the appropriate level of control over the direction of the company;
- The appropriate people succeed the founder as directors; and
- If applicable, that the relevant executors and/or trustees are sufficiently protected from liability in overseeing with the company’s affairs, given the company’s business may not be their expertise.
The Williams case, and other cases on which this firm has itself acted, are a salutary lesson that a measure of lifetime planning would have ensured that there were far fewer complications for the companies involved upon the owner’s death and much less cost to the relevant estate.
Gordon Dadds has detailed experience of such personal and corporate governance lifetime planning for entrepreneurs and can advise on the steps needed to avoid the above issues. If we can be of assistance, please do contact either Matthew Biles (MatthewBiles@incegd.com) in our Private Wealth team or Richard Elliott (RichardElliott@incegd.com) in our Corporate team.