Can a business continue to trade after a Director's death?

You may think that any business can continue to trade after the death of a director but this is not necessarily always the case.

If you are a sole director of a company incorporated under the Companies Act 1985 (“the 1985 Act”) and operating subject to Articles of Association incorporating the Companies (Tables A to F) Regulations 1985 (“Table A Regulations”), difficulties can arise following your death if there is no other director and/or company secretary appointed.

The difficulties with the 1985 Act/Table A Regulations

Regulation 29 of the Table A Regulations provides that upon the death of a sole holder of shares, his personal representatives will be recognised as having title to his interest.  No problem you would think.  Think again because Regulation 31 goes on to provide that, notwithstanding the provisions of Regulation 29, the personal representatives are not entitled to vote at any meeting of the company until they are registered as a shareholder.

The requirements for registration are set out in Regulation 30 and this is where the problems really exist.  In order to be able to register themselves as shareholders the personal representatives must give notice to the company that they are electing to be registered as shareholders.  Providing the notice is easy – a simple letter confirming the position will suffice.  However, the lack of a second director and/or company secretary means that there is no-one at the company to act upon receipt of the notice.  In these circumstances, it is necessary for the personal representatives to bring court proceedings seeking an order pursuant to Section 125 of the Companies Act 2006 (“the 2006 Act”) to rectify the register of shareholders so as to register them as holders of the shares previously held by the deceased director.

Once an order has been obtained the personal representatives would then be able to pass a written resolution (for which court approval can be obtained) appointing themselves as directors of the company in place the sole deceased director.

Time constraints

Whilst the only defendant to the court proceedings will be the company itself and as such it is very rare for proceedings to be defended, it is still necessary for wait for the matter to come before the court at a formal hearing and this can take several weeks, months in some cases.  It is also the case that the court will not consider the claim at a hearing without the personal representatives having first obtained a grant of probate.  Whilst the claim can therefore be issued (in an effort to save time) any hearing would have to be adjourned until such time as the grant had been obtained.  Depending on the complexity of the assets owned by the deceased it can often be six months or more before the personal representatives are in a position to do so, further delaying the obtaining of the order.  In the meantime, how is the business are to continue trading?  Without any further director and/or company secretary operating the business and authorising payments for staff salaries and supplier’s invoices, it may well be that the company has to cease to trade.

Conclusion

It can be seen from the above that operating a longstanding established company with only a sole director and subject to Articles of Association incorporated under Table A Regulations may well have catastrophic consequences upon the death of the sole director.  Best practice must therefore be to ensure that no business is run with a sole director only.  If, however, it is then clearly court proceedings need to be issued as a matter of urgency to ensure that an order can be obtained in as timely a manner as possible.