During the pandemic there have been many sad stories about the impact of an unexpected death on the family that are left behind. When I read about an outcome of a recent court case, it reminded me about a situation I had to contend with in 2015 where a sole director and shareholder suddenly passed away in their prime at 46.
It was a retail business that had been steadily growing with 11 outlets, a warehouse, a head office and employed over 100 staff. Unfortunately, when the director passed away, the articles of association of the company did not have any provision for what happened next. The individual also died intestate and the solicitors advising the family confirmed that a Letter of Administration could take three to five months to be obtained. In any event, even if there had been a Will, there can be a similar delay in obtaining a Certificate of Probate.
Why is this important? For two reasons really, (i) some model articles (particularly those adopted without adaption from 1 October 2009) allow for the personal representative of the last shareholder to have died to appoint a person as a director. However, if you do not have a valid Will where executors are properly appointed, Probate will be needed to confirm the appointment of the personal representatives and you are back to square one. (ii) over a period of 3 months with limited or no trading, a business can seriously deteriorate in value whilst it is rudderless.
In the case study above, the director controlled a significant amount of the day to day affairs of the company and was the sole signatory on the bank account. However, working alongside the company’s accountants and the family’s solicitor, we quickly identified that the company was in fact in financial trouble. We approached the Bank with a rescue plan and the Bank was very pragmatic and agreed to immediately appoint Administrative Receivers. This gave us the breathing space to continue to trade and to work out the best method of maximising the value of the company assets for the benefit of creditors and the family.
The recent case of Williams v Russell Price Farm Services, 2020 EWHC 1088 Ch provides another example of such a situation. Mr Price was the sole director and shareholder of his company. There was no provision in the company’s articles of association for the personal representatives to appoint a director; only shareholders could appoint a director. This left the company in a precarious position as it was unable to operate its bank account and therefore could not pay its creditors or carry out day to day business transactions. As a result, the executors of his estate made an urgent application to the High Court requesting that they be entered into the company’s register of members so that they could appoint a director without waiting for Probate to be obtained. The Court granted the order sought by the executors, but the need to apply to court and the costs involved with such an application could have been avoided with suitable company succession planning.
Company succession planning is essential to enable a company to continue to function on the death of a sole director. Not only should the articles of association provide for succession planning, but any Will that the sole director has should properly appoint executors and work seamlessly with the company’s constitutional documents to avoid leaving their family exposed to a period of uncertainty and unnecessary costs.
In light of these unprecedented times, I thought it would be timely to share this experience. For any professional advisors, I encourage you to review your client base to identify whether you have any clients that are in a similar position, and then recommend that they should not delay in putting appropriate succession plans in place. For any directors or business owners, if you have never considered this before, please do get in touch and I’d be happy to offer some advice.