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The Risks of Being a Sole Shareholder/Director

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The risks of being a sole shareholder/director: Court provides a timely reminder of the need to review your company’s Articles of Association

Are you a sole shareholder/director of your company? Do you have children, other family members or trusted employees who are heavily involved in the operational aspects of your business but the shareholding and director positions remain with you alone?  The High Court recently stepped in, using its powers to rectify the register of members, where a company was left in a vulnerable position after the sole shareholder/director died.

In the High Court case of Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited the Court was asked to intervene upon hearing an urgent application presented by the Personal Representatives (PRs) of the sole shareholder/director (Mr P). Mr P passed away leaving behind a functioning company with employee wages, VAT and invoices due imminently. Lancashire Cleaning Services Limited (the Company) had continued to trade from the date of Mr P’s death, but without a surviving director or company secretary the Company’s bank account was frozen and those running the Company were unable to fully operate the business.

Without a Grant of Probate or Letters of Administration, the PRs could not be entered into the Company’s register of members. Without such an entry, the PRs could not legitimately pass a resolution appointing a new director. Whilst normally the PRs would wait for the relevant Grant or Letters of Administration before approaching the Court, waiting was not a viable option; it could be too late for the Company. having a potentially devastating effect.  The Company could lose contracts and/or staff and incur fines for unpaid VAT.

The Company had adopted Articles of Association based on the Companies (Tables A-F) (Amendment) Regulations 1985 (Table A). Table A Articles allow for the transmission of shares from a deceased sole shareholder to his/her PRs upon the production of such evidence as may be required (in this case a Grant of Probate or Letters of Administration). However, in this case, the PRs could not appoint a director to the Company until they were entered onto the register of members, and as the Company did not have a director or company secretary to undertake such amendment to the register, the PRs were left in a catch-22 situation. The Company continued to trade after Mr P’s death but the PRs were left with no other option but to apply to the Court asking it to rectify the register of members by removing Mr P’s name as a shareholder and entering the name of the PRs in Mr P’s place; this would allow them to pass the necessary resolution to appoint a director who could then act in order to un-freeze the Company’s bank account.  

In contrast, the Companies (Model Articles) Regulations 2008 (Model Articles) allows the PRs of a deceased sole shareholder the right to appoint a person to be a director of a company which, in this case, would have prevented the need for the Court’s intervention.

This case provides a timely reminder of the need to review your company’s Articles of Association. It is important to remember how costly a court application such as this can be.  The below questions are some points to consider and something we can help you to answer:

  • Are your articles of association in line with your current needs?
  • Do you have a plan for the company to continue trading should the worst happen?
  • Will your PRs have the requisite powers they need to protect your company from being in a vulnerable position?
  • Does your company need a corporate governance health check?