When a sole director shareholder dies, his or her shares automatically pass to their personal representatives (PR’s), being the executors (if there is a valid will) or the administrators of his or her estate (if the shareholder dies intestate), under section 773 of the Companies Act 2006. This makes the PR (or whomever they elect to hold the shares) the sole shareholder in the company.
However, the company will still be without a director and one must be appointed. Under the Companies Act 2006 Model Articles of Association, this isn’t a problem as they provide that:
‘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’.
A problem does however occur where a company is operating under the Companies Act 1985 (or an earlier Act) prescribed Articles of Association (known as Table A Articles), or where a company is operating under outdated bespoke Articles of Association.
Under Table A Articles, in order to appoint a director, the shareholders of the company must vote on the appointment. A shareholder (in this case the PR) can only attend and vote at a meeting if they are registered as a member of the company.
However, the catch 22 is that only a director can amend the company’s register of members (thereby registering the PR as a member of the company). As the sole director shareholder has died, it is impossible for the PR to be added to the register of members, meaning the PR is unable to appoint a director.
How to avoid the catch 22
Where the Companies Act 2006 Model Articles of Association (or equivalent provisions included in a company’s bespoke Articles of Association) have not been adopted, the PR would need to apply to the court for the register of members to be amended, as in the recent case of Kings Court Trust Limited & Ors v Lancashire Cleaning Services Limited  EWHC 1096. However, it should be noted that His Honour Judge Hodge QC emphasised that the exceptional circumstances surrounding this case, such as the company’s inability to function without the intervention of the court and the imminent failure to pay the wages of the employees, were crucial factors in his decision to allow the rectification of the register.
In order to prevent the uncertainty surrounding a discretionary court ruling, we would urge companies, especially those incorporated prior to 1 October 2009, to review their Articles of Association and, if necessary, update them in order to protect their future.