The sole director-shareholder dilemma: Kings Court Trust Limited and others v Lancashire Cleaning Services Limited

Mr Pilling was the sole director and sole shareholder of a cleaning company, Lancashire Cleaning Services Limited (the “Company”). Sadly, Mr Pilling died suddenly on 28th February 2017. Following his death, the Company endeavoured to continue trading.

Before his death, Mr Pilling had prepared a Will appointing executors to administer his estate. However, regrettably, the Company did not have Articles of Association which would allow the executors to appoint a director, on the death of the sole director-shareholder.

The executors therefore had no legal authority to appoint a director or to make other important decisions. In particular, they were unable to change the register of members to remove Mr Pilling and to record the transmission of the shares into their names as executors of his estate. The executors, therefore, faced a serious dilemma as they were unable to step in and act.

To make matters worse, once the Company’s bankers, Natwest, were notified of Mr Pilling’s death they froze the Company’s bank account. The frozen finances left the Company unable to pay employee wages or other creditors. Consequently, the Company was in a deeply vulnerable position and it was feared that if employees were not paid then they would leave. There was further pressure to rectify the situation, as a potential purchaser had been identified, who would be looking to pay an attractive price to buy the Company as a going concern.

Consequently, an emergency application was made to the High Court, asking the court to intervene by using its statutory powers to order rectification of the register of members to include the names of the executors. This would then allow the executors to pass a written resolution to appoint a new director.

Due to the urgency of the situation, the application was made to the High Court prior to the application for a grant of probate. The judge, Judge Hodge QC, acknowledged that normally a company will not register executors as members until they are able to prove their title by producing the grant of probate. However, it was decided that in these circumstances, without the intervention of the court, the unnecessary delay involved in waiting for the issue of the grant of probate would potentially affect the survival of the Company and the interests of its employees. Therefore, on these grounds, the court used its power to rectify the register of members.

In this case, because executors derive their title from the Will, Mr Pilling’s shares in the Company devolved to the executors by operation of law from the moment of his death. The outcome would likely have been very different, if Mr Pilling had died intestate. As, on intestacy, the personal representatives’ authority derives from the Grant of Representation and only once this is issued.

Whilst Judge Hodge QC played down the decision by emphasising that he regarded the circumstances of this case as quite exceptional, it nevertheless highlights the risk that sole director-shareholder companies may face if the deceased has not undertaken appropriate planning during their lifetime both in relation to the company and their estate.

If you are a sole director-shareholder, you should review your articles of association to ensure that they outline the legal consequences of death and that these provisions are adequate. This is especially important if your articles were drafted some time ago. It may also be worth considering the appropriateness of appointing additional directors to ensure there is someone who can act immediately on death. In addition, you may wish to check that your Will contains sufficient powers to enable your executors to continue the business at least for the duration of the administration period.

This article was written by Freya Marks, Solicitor, Private Client, and Chris Smith, Solicitor, Corporate.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.