What should a business do when an unexpected circumstance occurs?

Many small, independent companies have a sole director-shareholder. But what happens if that individual dies? How can someone else step in and run the company? Well, if that company has adopted Table A articles, it may have a problem…

Managing the deceased’s estate

When an individual dies, the person given the authority to manage that individual’s estate is either the executor under a will or an administrator. This person will be the deceased’s personal representative (PR). The estate of the deceased is transferred to an executor under a valid will, which also gives that executor the authority to act for the estate. A grant of probate will usually be required to give proof of title to the deceased’s estate.

If the individual is a shareholder, the legal title to the shares will pass to the PR and this will usually be reflected in the company’s articles. However, the PR will not be able to exercise any voting rights unless it is registered as the holder of the shares in the register of members. This will pose a problem for the PR: it will not be able to re-register the shares in its own name as there is no director available to update the register of members. But, under Table A, the PR has no power to appoint a new director until the shares are registered in its name. So there’s a stalemate!

The only option open to a company with unmodified Table A articles is to apply for the register of members to be rectified. The court will grant rectification of a company’s register if:

• someone’s name is entered in or omitted from a company’s register of members without sufficient cause; or
• an error is made, or unnecessary delay takes place, in updating a company’s register.

Rectification of the register

There have been situations involving the death of a sole director-shareholder in which the PR, an executor in each case, applied for a company’s register of members to be rectified to include the name of that executor.

In both cases[1], the sole director-shareholder of a company died, leaving no living director or shareholder. Both companies had adopted unmodified Table A articles. The shares of both deceased director-shareholders passed to their executors. Following the death, both companies began to have concerns over their ability to trade and one even had its bank account frozen following delays in payments being made to HMRC. This raised further concerns about the ability to pay employees, increasing the chances of staff leaving en masse. The companies were in serious jeopardy.

To remedy the situation and to ease these concerns, the executors in both cases asked the court to rectify the register of members and have the deceased shareholder’s name replaced with that of the executors. This would allow the executor to pass a resolution appointing new directors to take control of the company.

Do you have to wait for probate to be granted?

The application for grant of probate had been made in both cases, but had not yet been granted. However, following a previous decision[2], the court held that the grant of probate was not required where there was no dispute as to the title of the shares. Under the articles, the shares had been transferred to the executors and they were entitled to be registered as shareholders.

In normal circumstances, a company would be required to wait until probate is granted before registering an executor as the holder of shares. But the circumstances in both cases were exceptional in that any delay would have plunged the two companies into further financial distress and it may have been too late for the companies had the executors had to wait for a grant of probate.

The claims for rectification were successful and the registers were amended.

Mind the Table A gap!

These problems arose from the form of Table A articles adopted by both companies. They contain a gap which results in an executor being unable to re-register shares in its own name or appoint a new director where a company has no remaining directors or shareholders.

A company with Table A articles should amend these to ensure provisions are included which prevent this problem should the company be left without anybody in office. Alternatively, a company could look to adopt the Model Articles, which do contain a provision giving the PRs of the last shareholder to die the right to appoint a person to be a director. The Model Articles apply by default to all companies incorporated on or after 1 October 2009 but could be voluntarily adopted by a company incorporated before that date.