The importance of updated articles of association
Jennifer Adams looks at the key legal issues that could arise should a sole director or shareholder die without the correct articles of association in place.
The processes that a company (other than a dormant company) goes through in its lifetime are the same whatever the reason for incorporation.
Starting as someone's dream, then expanding as an increasing amount of work is undertaken. Staff are then required, the company matures, consolidates and then something unexpected happens: the owner/shareholder dies.
Ask any client and invariably they would have not thought about succession (ie what will happen to the business when they are gone) but by not doing so they can leave their customers, suppliers, staff and family with problems that could prove costly to resolve.
The immediate concern is who takes over the day-to-day running of the company, not least who pays the bills including any salaries.
Often it is only a director who can authorise payments from the bank and with that sole director no longer around bills cannot be paid, the business will not be able to continue unless and until a new director is appointed.
Furthermore, without a director, the company will be in breach of its statutory requirement to have at least one natural director at all times (s155 Companies Act 2006).
When a shareholder dies, the shares normally form part of the deceased's estate; the right to the interest in those shares passing to whoever inherits them under his or her will, or under intestacy if there is no will. The voting rights of the shares are suspended unless and until the deceased's personal representatives transfer the deceased's shares to new owners, or elect to be registered as shareholders themselves.
The shareholders of a company are those whose names are entered in the register of shareholders, therefore unless and until that register is updated, the deceased remains the registered holder of the shares. For the register to be amended, the personal representatives must obtain a grant of probate from the court (administrators must obtain letters of administration if no will).
What happens next depends on the company's articles of association, the shareholders' agreement (if any) and the ages of the beneficiaries of the shares rather than the contents of any will.
Articles of association
Problems arise for companies incorporated prior to the 2006 Companies Act regime using the default Companies Act 1985 (CA 1985) articles. These require that transfer of share ownership must be approved by the directors but with no director available under a sole directorship then the personal representative of the deceased shareholder will have to seek a court order for the appointment of a new director to approve a transfer or election of shares. Even if they are entitled to be registered as shareholders under the articles, personal representatives cannot just update the register themselves as that can only be undertaken by a director or an appointed company secretary.
This can have major practical problems, as shown in the case of Kings Court Trust Limited, Executors of the late Eric Anthony Pilling v Lancashire Cleaning Services Limited [2017- EWHC 1094 (Ch)] - see below.
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Companies incorporated post the Companies Act 2006 (CA2006) do not have this problem as article 17(2) of the model articles of association provides for the personal representatives of the deceased shareholder to appoint a new director of the limited company. The article specifically addresses this problem by stating that “In any case where as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing to appoint a person to be a director.”
However, problems may still arise where articles (under whichever Companies Act) have been amended eg requiring a minimum number of directors for the company to continue and the recent death has caused the requirement(s) in the articles to be breached.
In situations where either the company is under articles that exclude the default 2006 'Model Articles', and those amended articles do not provide for personal representatives to appoint a director, are under CA 1985 and have not been modified to allow personal representatives to appoint a director, then the articles will have to be amended under s125 Companies Act 2006 via an application to court so as to give the personal representatives the power to appoint a director.
The application must be for the court to:
- order the 'rectification' of the register of shareholders; and,
- authorise the personal representatives to carry out that rectification.
This can be time-consuming and costly, plus the court might not agree to the application as the court's power to rectify a company's register of shareholders is discretionary.
Courts’ discretion only
In Kings Court Trust Limited, Executors of the late Eric Anthony Pilling v Lancashire Cleaning Services Limited , the articles were the Table A articles under CA 1985 and as such held no provision for the personal representatives to appoint a director where, as a result of death, the company had no other shareholders or directors.
On the sole directors' death, the company's bank accounts had been frozen, and as such the company was unable to pay staff wages, an outstanding VAT liability and other creditors.
In this case the High Court held that where a company had no acting officers and delay in appointing any may lead to the failure of the company, then the court was able to exercise its discretion to order to the company's register of shareholders to be rectified in favour of executors even though a grant of probate had not yet been obtained
The judge made clear that the court would not normally make such an order; this case was not a precedent for where a company still has shareholders and directors able to act.
Companies House will need to be informed of any change by the completion of form TM01 (termination of a company director appointment) and/or form TM02 (termination of a company secretary appointment) as may be the case. The company’s register of directors and/or register of secretaries will need to be updated. The transfer of shares is reported to Companies House on the next confirmation statement.
There are still companies operating under the outdated CA 1985 Table A articles possibly because the directors are unaware of the implications in doing so and as such have not considered amending or updating. Such companies will meet problems should the sole director or shareholder die and one needs to be appointed to ensure that the company continues.