Company owners and the need to plan for unexpected death

While everyone should make a Will and put their affairs in order to avoid difficulties for their surviving family after their death, if your client is a small company owner this necessity is exacerbated. The company’s suppliers, customers and employees could all be severely impacted if your client has not made plans for unexpected death or incapacity.

The late Mr Pilling

This was illustrated in a High Court case which arose following the death of Mr Eric Pilling, the sole shareholder and director of an office cleaning company called Lancashire Cleaning Services Limited. Following Mr Pilling’s death the company was left without any directors or a company secretary. The company bank account was frozen, leaving the company unable to pay staff wages, creditors and its VAT bill. Moreover, a potential sale of the company was threatened by the company’s inability to operate.

Mr Pilling had made a Will, for which an application for a grant of probate was pending. When granted this would enable the Will’s executors to be registered as shareholders, which in turn would allow the appointment of a new director to run the company. However, a grant of probate can take some time to obtain: it is common for there to be at least six months between the date of death and the issue of a grant.

Mr Pilling’s executors therefore applied to the High Court for an order that the register of members of the company should be rectified before a grant of probate was obtained by adding the names of the executors, so enabling them to appoint a new director with the legal status to run the company.

The court made the requested order, making it clear that the circumstances of the case were “quite exceptional”. By implication, in the normal course of events an order of this nature would not be made, and any change to the company membership register would have to await the issue of a grant of probate.

How to avoid the problem

The position that Lancashire Cleaning Services found itself in can be avoided if company shareholders plan ahead:

It is always advisable to have more than one officer of the company to ensure that someone can take control in the event of an unexpected death.
Careful thought should be given as to the identity of a suitable person to carry on running the business or to wind it up.
Particular consideration should be given to the appointment of the executors of the company owner’s Will and they should have the necessary powers conferred on them by the Will to run the company pending a sale or its winding up.
If there is more than one shareholder it is advisable to review the existing articles of association and to consider putting in place a shareholders’ agreement which could set out what happens on the death of a shareholder.
Consideration should be given as to whether the surviving shareholder should have the option of buying the deceased shareholder’s shares from his estate. In the case of a family owned and run company the transfer to trusts of company shares should be permitted, allowing a shareholder’s surviving spouse to put into effect inheritance tax efficient planning.
Key man insurance should be considered, either to provide funds for a buy out of the deceased shareholder’s shares, or to cover some of the costs involved in losing a vital member of the company.
Succession planning to identify and nurture those who will ultimately take over from a key member of the company is essential.

Wills and incapacity

As mentioned, Wills are particularly important for small company shareholders, not least because it is possible to put in place planning that can ultimately substantially reduce the inheritance tax burden of the shareholder and their family.

The possible incapacity of the shareholder should also be considered. In the event of incapacity, a director will usually be forced to resign under the terms of the company’s governing documents, but it is advisable to draw up a lasting power of attorney.

Planning ahead can avoid the unfortunate situation experienced by Mr Pilling’s estate and the consequent stress on his family and the company employees.

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