Company owners and the need to plan for unexpected death
What will happen to your business if you unexpectedly die or become incapacitated?
While everyone should make a Will and put their affairs in order to avoid difficulties for their surviving family after their death, if you are a small company owner this necessity is exacerbated. The company’s suppliers, customers and employees could all be severely impacted if you have not made plans for unexpected death or incapacity.
Case study: The death of the sole shareholder and director
An example of the problems that can arise is provided by a High Court case which arose following the death of Mr Eric Pilling. Mr Pilling was the sole shareholder and director of an office cleaning company called Lancashire Cleaning Services Limited. Following his 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, it would enable the Will’s executors to be registered as shareholders. This 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 six months between the date of death and the issue of a grant.
Mr Pilling’s executors 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. They wanted to add 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.
The position that Lancashire Cleaning Services found itself in can be avoided if company shareholders plan ahead.
What can I do to protect my business?
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 wind it up. Particular consideration should be given to the appointment of the executors of your Will. 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 in your company, it is advisable to review the existing articles of association and to consider putting in place a shareholders’ agreement which could determine 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 their estate. If your company is owned and run by your family, the transfer to trusts of company shares should be permitted, allowing your 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 your or another 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 you or a key member of the company is essential.
As mentioned, Wills are particularly important for small company shareholders, not least because it is possible to put in place planning that, ultimately, can substantially reduce the inheritance tax burden to you and your family.
Loss of capacity
It is also important to consider the possible incapacity of you or another shareholder. In the event of incapacity, a director will usually be forced to resign under the terms of the company’s governing documents.
Loss of capacity could be temporary; for example, the result of an accident and so when capacity is regained, the company responsibilities will resume as normal but during that window, a trusted and appointed attorney will be able to keep your business ‘ticking over.’ Loss of capacity may also be the result of a degenerative disease such as dementia, but it is always our recommendation for business owners to appoint persons they trust to help manage the business if either of these scenarios were to play out. Without an attorney appointed, applications to the Court of Protection are lengthy and costly and could even lead to unrecoverable losses for your business.
Planning ahead to protect your family and employees from unprecedented stress is surely reason enough to put provisions in place in case any of the scenarios above were to play out.
Our specialists can help you plan for the unexpected. Please contact us on 0800 652 8025 or get in touch online.