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Court decision provides a mechanism for business continuity following the death of Sole Shareholder-Directors

The High Court has granted an exceptional order pursuant to section 125 of the Companies Act 2006 for rectification of a company's register of members, to replace a deceased member with the executor named in her will prior to obtaining a grant of probate.

Background

In many companies, an individual may act as both director and shareholder. In such circumstances the company's power to make decisions relies solely on that individual and consequently the company is left in a vulnerable position following the death of the individual.

Private companies who have adopted Model Articles under the Companies Act 2006 (the Act) will have existing provisions within their articles which allow for the executor to appoint a person to be a director (subject to certain provisions). However, companies who have adopted earlier model articles (called Table A), do not have such provisions within their articles. Consequently, the executor is unable to enter their name on the register of members and therefore cannot appoint a director to continue the running of a company, which is of course, disastrous.

As a result, the executor will need to go through the lengthy process of obtaining a grant of probate entitling them to be added to the register of members.

Facts

The High Court case of Ellot v Cimarron UK Ltd considered whether the court was able to exercise its powers under section 125 of the Act to order rectification of the register of members following the death of a sole shareholder-director.

The deceased was the sole member and director of the company and therefore had no surviving directors or shareholders following her death. The company's articles (which adopted Table A) contained no provisions which would empower the executor to appoint a director who could update the register and take control of managing the company. The company being left with no directors or shareholders created a major risk of its bank account being frozen, preventing the company from trading.

In addition to applying for a grant of probate, which had not been issued yet, the executor brought a Part 8 claim seeking a section 125 order rectifying the company's register of members to remove the deceased's name from the register of members and replace it with his own. This would enable the executor to pass a resolution appointing new directors who could then take control of the company.

Decision

The executor's application was successful. The court was satisfied that it was not necessary for an executor to obtain a grant of probate in order to be entitled to be registered as shareholder, where there is no dispute to their title. The court went on to stating that whilst in the ordinary course, a company should await the grant of probate however, where there are exceptional circumstances like those of this case, the company does not need to do so.

Comment

This case highlights the difficulties resulting from the death of a sole shareholder-director, whereby the company has unmodified articles based on Table A or bespoke articles which do not cover the issues raised. Therefore, it is vital that companies with a sole shareholder-director revisit their articles and ensure that they include the appropriate provisions to enable continuity of a business in the event of the death of the sole shareholder-director without having to seek court approval.

For more information contact Pauline Wild in our Corporate department via email. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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