An article published in the June issue of Taxation, written by our Tax Partner Paula Sparrow on the subject of business continuation after the death of a director…
Paula Sparrow advises on the problems that can arise on the death of sole director or shareholder; forward planning is important.
Accountants and tax practitioners can glean much information about clients through their personal and business finances, but as advisers we need more than just numbers to appreciate the client’s aspirations and objectives. Understanding family dynamics is fundamental to knowing clients well enough to provide valid and meaningful tax planning advice. Clients then become more than only numbers to us, so it is always a little personal when they pass on.
I took over responsibility for Jim, a larger-than-life farmer type, no-nonsense character, a couple of years ago. Jim was colourful in many ways and came with the complications of many modern families: two adult children from a first marriage, an ex-wife and her new husband, and Jim’s new wife. Having dealt with several clients who died intestate, one of my first questions to every new client is whether they have a valid will. Jim confessed that he had not renewed his since he had remarried, so when the call came to advise that he had died unexpectedly, my first concern was that he had died intestate. Fortunately, the will had been renewed a few weeks previously, but that was not the end of the story…
Jim was the director of a number of companies and, unfortunately, was the only director for one of them which owns some tenanted rental properties. Obviously, directors are critical to the operation of companies, making the various day-to-day management decisions needed for the company to operate and, in effect, the death of the sole director halts all corporate activity. It is therefore important to understand who has the power to pick up the reins to keep the company operational and fully functional.
Often, with sole director companies, there is not an immediate need for someone to step into their shoes because they tend to be working on projects or providing services, but tenanted properties have a habit of throwing up practical problems that need addressing quickly, so it was vital to establish who had responsibility as early as possible.
Transfer of responsibility
Generally, the personal representative stands in the shoes of the deceased for the purposes of managing assets. This would be the executor appointed by the will, or the administrator in the case of an intestate estate. But the responsibilities of the office of director do not pass under the will.
The appointment of directors is usually in the gift of the company shareholders under the articles of association. Article 17 of the latest model articles states that directors can be appointed under an ordinary resolution. The Companies Act 2006, s 282 defines ordinary resolutions, requiring that a simple majority of shareholders approve the appointment. However, the model articles have evolved over the years, so that an older company will have different articles to newer companies.
The latest model articles also consider a situation where the last shareholder and director has died, giving the power to appoint new directors to the personal representatives of the last shareholder, thus ensuring there is always someone who has the power to appoint. However, model articles are just a framework for a starting point and can be altered to suit the specific needs of the company. It is therefore important to read each company’s articles to ascertain the precise rules that apply to it.
Shares owned by the deceased pass to his executors, and they then hold the power to make the appointment of the new director. Problems can arise if the director dies intestate because no one has been appointed to be responsible for the estate. It is usually a matter of someone stepping up to take responsibility, which can mean a requirement for court authority in complex cases. However, not all single director companies are owned by the director, so that the power of appointment may lie with third parties. Jim had created a family trust some years before with a view to protecting assets, so that the power to appoint trustees lay with the trustees of that settlement.
Unfortunately, Jim was the sole trustee and had not got around to appointing new trustees. In these circumstances, Jim’s personal representatives are able to act as trustee to make the shareholder decisions. However, if all the trust beneficiaries are adults, they may act in unison to remove and appoint trustees, so it is by no means certain that the personal representatives will in fact hold the power.
As advisers we have a duty of care towards the company and its officers and must consider confidentiality when discussing matters with anyone who enquires about the company’s affairs.
In complex situations it may not be clear who has control over the company. Our initial point of contact is the director, but when that is gone we need to fully understand to whom the directors’ duties pass before we, as advisers, can safely provide information.
Paula Sparrow is tax director at Butt Miller chartered accountants. She can be contacted by telephone on 01276 25542 or email: email@example.com.