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Expert answers: What happens when a limited company owner dies?

Readers’ Question: What happens when a Limited company has only one official Director and that person dies suddenly?

Expert answers: what happens when a limited company owner dies?

Expert answer:  The answer to this question is provided by Helen Christopher from Orange Genie.

It is not uncommon for a small business to be owned and operated by one individual. In this case, the sole director/shareholder not only owns the business but they are also responsible for running it. Unsurprisingly, sole directors can easily become embroiled in the daily tasks of running their business but they should take a moment to consider what would happen in the unfortunate event of their death or incapacity; the continued existence of the business could be under threat and there may be significant assets, including bank account balances which effectively become frozen.

Two key issues arise:

Registering the shares in new ownership

By law, when a shareholder dies, his shares pass to his personal representatives (PRs) as set out in the will or to administrators if there is no will. The PR’s or administrators then have a general right to be recorded on the company register as the new shareholders. Alternatively, the shares may be transferred to the beneficiary of the deceased estate, who is then registered as the new shareholder. The registering of the new shareholding requires a director to undertake this task at Companies House.

Appointing a new director

How a new director is appointed will depend on the Companies Act under which the company was first incorporated. Where a company has been incorporated under the Companies Act 2006, applying the model Articles of Association, the PR’s or administrator of the deceased may appoint a director who can then amend the shareholding on the company register, enabling the company to continue to operate.

For companies incorporated under the Companies Act 1985, with Table A articles, the PR’s or administrators of the deceased sole shareholder do not have an automatic right to appoint a new director who can them undertake the formality of registering the new share ownership. Until registered as shareholders, the PR’s or administrators are prevented from exercising rights as shareholders such as passing resolutions to appoint new directors. In this situation, the company is effectively stuck in a vacuum unable to operate or move forward.

In these circumstances, it is necessary for the PR’s or administrators to apply to the court for an order to appoint a new director in order to resolve the situation. This application is raised under the Companies Act 2006 s125. A successful application will see the court allow for the register to be amended to show the new shareholder, which in turn will then allow for the appointment of a new director.

Lasting Power of Attorney

Business continuity can be drastically affected if the sole director/shareholder becomes severely ill or incapable of acting. This situation can be resolved with the appointment of a Lasting Power of Attorney (LPA). A sole director/shareholder can appoint one or more attorneys to deal with his affairs, including the day to day running of the business and exercising his rights as a shareholder, commencing immediately or upon him suffering from mental incapacity. This can be extremely useful in the event of advanced terminal illness, times of long-term illness or where the director/shareholder finds himself away from the office unexpectedly.

The Company’s Articles of Association must be reviewed to ensure that the attorney can validly exercise such decision making and that the terms do not unwittingly override or restrict the director/shareholders desire for his attorney to have such rights. By ensuring the terms of the Articles are up to date and that an LPA has been put in place, the director/shareholder can help future proof the company and avoid any “vacuum” upon his incapacity or death.

If you are the single director/shareholder of your company now would be a good time to undertake some housekeeping.

  • Ensure you have an up to date Will and have identified your PR’s
  • Consider appointing a Business Lasting Power of Attorney
  • Review your company’s articles of association. If the company was established under the 1985 Act, it is advisable to consider updating the Articles to reflect the provisions of the Companies Act 2006. This is a relatively simple process of passing a resolution updating the wording and filing a new version at Companies House. A review and an update can help reduce difficulties in times of future distress.

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More on limited company shares and Companies Act 2006.