“Live as though you will die tomorrow, but farm as though you will live forever.” – John Marsden
“…But always remember that you might not.” – Martin Reynolds
Readers are (or should be) already familiar with me urging owners and directors of companies to consider creating Lasting Powers of Attorney so that the continued running of their businesses can be taken care of in the event mental capacity issues arise.
Owner/directors should also make appropriate provisions in their Wills to ensure that control and management of their business passes to the right people to ensure continued operation and protect value in the event of their death.
Owner/directors should also however look carefully at the Articles of Association of their companies (or get someone to do this for them). If significant financial loss is to be avoided it is critical that adequate provision be made for the (always unexpected) death or incapacity of the person in charge – in particular where this person is sole director and sole shareholder of the company.
This is illustrated in a recent decision of HHJ Paul Matthews sitting in the High Court in Bristol (Insolvency and Companies List) Williams, Williams & McCreath v Russell Price Farm Services  EWHC 1088 (Ch).
Firstly, however, a further bit of background:
Section 112 Companies Act 2006 (‘CA 2006’) defines the members of a company (in a company limited by shares, its shareholders) to be the people who have agreed to become members of the company and whose names are entered on its register of members. There has been some recent relaxation of this provision – allowing a company, where a ‘section 128B election’ has been made, to keep its register of members with the Registrar of Companies (i.e. Companies House) but, essentially, this simply changes the location of the register not its content or function.
This will no doubt come as a great surprise to the many people who approach me in relation to the sale of their businesses and tell me ‘the company books’ (of which the register of members is one element) are ‘kept by the accountant’ and/or are ‘all online nowadays.’ Nonetheless (as can be seen below) banks, the Courts (and, indeed, buyers of businesses) tend to approach this provision in a fairly narrow way.
Anyway, back to the story:
On 13 February 2006 Russell John Price set up (‘incorporated’) a limited company – Russell Price Farm Services Limited. He made himself the sole director and shareholder of the company.
The company carried on a farm contracting business serving the farming community in Herefordshire and adjoining counties. Services provided included seasonal planting and harvesting, which involved the use of various items of machinery.
The Articles of Association of the company incorporated standard ‘Table A’ articles from the then current regulations (the Companies – Tables A to F – Regulations 1985). These provide:
- 29: If a member, who is a sole owner of shares, dies, the only person recognised as having any title to his (or her) interest in the company will be his (or her) Personal Representatives;
- 30: A person becoming entitled to a share in consequence of the death or bankruptcy of a member may, subject to such evidence of that entitlement as the directors may require being produced, elect either to become the holder of the share [i.e. be entered in the register of members themselves] or – subject to executing a transfer of the share to the relevant person – have a person nominated by him registered as the holder of the share [i.e. have someone else entered in the register of members];
- 31: A person entitled to a share as a result of death shall not be entitled to attend or vote at a meeting of the company unless/until registered as holder of the share.
Crucially there was no provision for Personal Representatives to appoint a director or directors in the event of the death of a member (shareholder) who was both the sole shareholder and the sole director prior to being entered in the register of members.
On 28 February 2020 Mr Price drew up a Will (‘the Will’) naming Martin Williams, Gareth Williams and Wendy McCreath (‘the Executors’) as his Executors. Under the Will 90% of the shares in the company were left equally to his daughter, Lucy Price, and his son, Thomas Price as part of the residuary estate.
On 8 March 2020 Mr Russell died.
Now, as anyone with a bit of farming background will know, March is a very busy time of year in agriculture and the company quickly found itself in difficulty. At the same time the company’s bank, with the particular wisdom peculiar to bankers, on finding that the company now no longer had a director, froze the company’s bank account.
As a result sums owing to creditors (£110,064.99) – including machinery hire companies – could not be paid. There was, therefore, an urgent need for a director to be appointed.
Generally speaking, a director of a company can be appointed by the members (shareholders) or (where there is appropriate provision in the Articles) by the other directors. All of the shares of the company were however now in Mr Price’s Estate and the Executors (as appointed under the Will) would not be entitled to vote at any such meeting unless/until they were (or someone nominated by them was) registered as holders of the shares (see Article 31 Table A above).
There were then two further issues:
- It is common practice to require that Personal Representatives produce a Grant of Probate/Letters of Administration to the directors in satisfaction of the requirement for ‘evidence’ at Article 30 Table A (see above) and it was anticipated it would be some time before the Grant was obtained (Mr Price’s Estate was complex and had various assets); and
- There were, in any event, no longer any directors to whom such ‘evidence’ could be produced.
This was not an administrative error of a kind which Lucy, appointed as company secretary on 27 January 2020, could correct and an application was therefore made to the Court to exercise its power under s.125 CA 2006 to rectify the register and enter the Executors as members. This power arises when the name of a person is, without sufficient cause, entered in or omitted from the register.
HHJ Matthews made the Order applied for, pointing out that Grant of Probate, once obtained, dates back to the date of death, in effect ratifying the acts of the Executors in the meantime. An Executor derives title from the Will and the property of the Deceased vests in him from the moment of the Testator’s death.
To address the resultant risk to third parties dealing with the Executors prior to the Grant, HHJ Matthews required a series of undertakings from the Executors:
- Not to renounce Probate;
- To apply for Probate as soon as possible;
- To make all reasonable efforts to obtain the necessary information to make the application; and
- (Most controversially) to pay all necessary taxes as required so that probate would issue, if necessary from their personal assets (not, as originally offered by the Executors, ‘from the Estate.’)
HHJ Matthews further held that, whilst in the normal course of events a company would not be in default in refusing to enter on the register of members the name of a Personal Representative of a deceased member without production of a Grant of Probate/Letters of Administration, on this occasion – taking account of all of the circumstances – an Order under s125 CA 2006 should be made.
A satisfactory outcome, in the end….
The above difficulty has been addressed through statute in relation to more recently incorporated companies. In particular Art 17(2) of the Model Articles for Private Companies Limited by Shares (which apply to most companies incorporated under CA 2006) provides:
In any case 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
It is clearly however worthwhile for owner/directors to look carefully at the Articles of Association of their companies and see if these need to be amended or modernised – or to get someone else to do this for them. The Property & Commercial Team at Barrett & Co would be happy to help at any stage of this process.