Succession S4 — a cautionary tale for business owners (spoilers)

Logan Roy certainly exited stage left leaving his family with a lot on their plate — “It’s not enough to be right, you’ve got to be persuasive” (as he said in one of his reflective and less sweary moments).

Whether you are a media mogul or the leader of one of the myriad other entrepreneur-led businesses that are a mainstay of the UK economy, we would urge you to take the time to read this cautionary tale and to similarly reflect.

Following the death of a shareholder and/or director of a company, the company and those appointed to administer the deceased’s estate (the Personal Representatives (“PRs”)) will review the company’s Articles of Association (“AoA”), Shareholder Agreement (“SHA”) and the deceased’s Will.

Together, the AoA, SHA and will (or where there is no will, the Intestacy Rules (“IR”), will dictate both how a director will be appointed in the deceased’s place (if necessary) and/or what is to happen to the deceased’s shareholding.

The death of a director

Where the business has more than one director, it can ordinarily run without too much disruption. The AoA will likely have some provision for the appointment of directors, for example by ordinary resolution or by a decision of the directors. Similarly, the AoA will likely contain provisions in respect of meetings and voting, where the death of a director is likely to have an impact on such issues.

From a practical point of view, immediately important banking issues may arise if the deceased is the sole signatory on the bank account or there is a joint signature requirement on the bank mandate. The bank may, understandably, take steps to freeze the operation of the accounts causing immediate business pressures at an already difficult time.

The death of a shareholder

In the absence of any specific provisions in the AoA or SHA, the deceased’s shares will pass in accordance with the will or the IR.

Companies will therefore often include provisions in their AoA or SHA to govern the transfer of the deceased’s shares, as the business otherwise runs the risk of the family/friends of the deceased being required/in a position to make decisions without any knowledge of the business. This may, for example, include a contract between the shareholders that in the event one of them passes away, the surviving shareholders have an option to purchase the deceased’s shares (known as a cross option agreement).

Where the AoA or SHA conflict with the will, this can give rise to potential disputes between the remaining members of the company and the beneficiaries of the deceased’s estate. If a company wishes to ensure that the AoA, SHA or any other contracts prevail, it should ensure that any provisions are clear and precise and that the potential recipient of any transferred shares is correctly named.

The death of a sole director and shareholder

For companies without bespoke AoA and which were incorporated after the implementation of the Companies Act 2006, the personal representatives will likely be able to appoint a new director without too much controversy. Wherever bespoke AoA have been adopted by a company, the position will be governed by the content of those Articles.

However, what happens where:

• The deceased was the sole shareholder and director in the business;
• Under the AoA the deceased’s shares are transmitted by operation of law to the PRs;
• The PRs are entitled to elect to become the shareholders and to be registered as such;
• The PRs have the rights of shareholders but are not able to vote at any meeting until being registered as shareholders; and
• Only the members of the company, or the existing directors, can appoint a director?

This can occur where companies do not have bespoke AoA and were incorporated before the implementation of the Companies Act 2006. This is because the default AoA of companies prior to the Companies Act 2006 do not enable personal representatives to appoint a new director, who would in turn register the personal representatives as shareholders.

The dilemma facing the PRs and the company is therefore that:

1. 1. There are no directors who can register the personal representatives as holders of the deceased’s shares; and
   2. Until they are registered, they cannot pass a resolution to appoint a director.

Application for an order pursuant to Section 125 of the Companies Act 2006

There is no provision in the Companies Act 2006 which deals specifically with this problem.

However, in three first instance judgments, the High Court has confirmed that the court has power to order rectification of a company’s register of members in similar circumstances, under Section 125 of the 2006 Act. This provides:

(1) If —

(a) the name of any person is, without sufficient cause, entered in or omitted from a Company’s register of members, or

(b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member, the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.

In King’s Court Trust Limited v Lancashire Cleaning Services Limited [2017] EWHC 1094 (Ch) [2017] Bus LR 1255, the PRs of the deceased sole director and shareholder applied for an order under s.125. It was held that even though the PRs had not yet obtained a Grant of Probate, they had standing to bring the proceedings. It was held that, quite exceptionally, there was no power, without court intervention, to enter the executors in the register or for any director to be appointed in place of the sole deceased director. There was no company secretary and a degree of urgency (in order to pay salaries etc) and accordingly it was held that the court had power to make an order under s.125 and should do so.

Similarly, in Christopher James Ellott v Cimarron UK Limited [2017] EWHC 3872 (Ch) the personal representatives of the deceased sole director, shareholder and company secretary had applied for a Grant of Probate but it remained outstanding. It was again held that a Grant of Probate was not necessary for an executor to become entitled to be registered as a shareholder where there was no dispute as to their title.  A similar order was made pursuant to s. 125.

Finally, in Williams v Russell Price Farm Services Limited [2020] EWHC 1088 (Ch) [2020] BCC 636, the PRs had not yet applied for a Grant of Probate, but it was held that there was a “jurisdictional gateway to the court making an order under s.125” in such circumstances.

Where matters cannot wait until a Grant of Probate had been applied for and obtained, the court may seek undertakings from the PRs that:

• they would not renounce probate;
• they would apply for it as soon as possible, making all reasonable efforts to obtain the necessary information for that purpose; and
• they would pay all necessary taxes as required so that probate could issue.

In addition to these undertakings and in our experience, it can also assist if the applicant PRs take steps to ascertain whether a caveat has been lodged in the estate and be prepared to relay those steps to the court.

This application is prepared by way of a claim form, witness statement of the PRs and a draft order (with the requisite undertakings) in the terms being sought. Service of the application can often be dispensed with where there is no officer to receive or respond to the application.

Conclusion

Where there are no directors who can register the PRs as holders of the deceased’s shares and, until they are registered, they cannot pass a resolution to appoint a director, significant problems can arise. For example, upon being notified of the deceased’s death, it is likely that any company bank accounts will be frozen by the company’s banks. The business is directionless, has no officer capable of acting on its behalf and cannot carry out even the most basic of transactions (such as paying employees and suppliers).

The upshot is that there is a significant risk that the business is irreparably damaged and its future and that of its employees is in jeopardy unless urgent action is taken.

PRs are able to obtain a court order to achieve a solution to their dilemma, and even where a Grant of Probate has not been applied for (on the proviso that suitable undertakings are provided).

Crucially, PRs must act expeditiously in applying to ensure the future of the business. By communicating with solicitors early on in respect of the application, as well as ascertaining the value of the deceased’s assets and liabilities to submit an Inheritance Tax Account to HMRC and apply for a Grant of Probate, PRs put themselves in the strongest position possible to obtain an order without undue delay.

Weightmans have acted in successfully securing such court relief. A preferable scenario, however, is advance planning, and for long-established family businesses (in particular) to review their AoA and to consider this aspect and address it, with appropriate professional advice, as part of their succession planning.