The dangers of being the sole director and shareholder

In 2019, we were asked to advise two companies following the unfortunate deaths of their sole directors and shareholders. This tragic incident left both companies in a difficult position with significant practical problems. The first being that in many small businesses the director has most of the knowledge of the business, its customers, the current work being undertaken and the financial position. This knowledge can all of a sudden be lost. Secondly, in some businesses the director is the sole signatory of the bank account resulting in the bank account effectively being frozen with no ability to pay any pressing creditors of the company. Finally, and most importantly, the appointment of new directors can typically only be made by the shareholders or the directors of the company. In these scenarios there is no one available to exercise this power.

This was the position that we were faced with when approached by P&R Construction, who provided construction management services to builders and property developers. Whilst the company had a significant amount of cash resources, the bank account had been frozen and trading had evidently come to a complete stop due to a short illness of the company’s sole director and shareholder.

Due to the company having no active director, the sole shareholder’s estate and assets were tied up in probate which presented problems.

A brief review carried out on the company’s finances found the business to be insolvent. With no access to the bank account, there were no funds to pay bills or creditors. Creditors were sympathetic to the company’s position but pressing for a solution to the impasse.

We knew that probate would take some time, so with our assistance an application was made to the Court for the company to be placed into liquidation and for our firm to be appointed as liquidators which allowed us to take control.

dangers of being the sole director

During the liquidation we were required to recover the cash balances within the company’s accounts, undertake a review of the company’s contracts, recover insurance and HMRC refunds and once there was sufficient funds within the liquidation we then reviewed the claims received against the company comparing these against what company records were available.

Original expectations were that creditors would be repaid approximately 1/3 of their debt. We were subsequently successful in being able to repay the creditors 47p in the £ on their claims in little over one year from our appointment.

It was a very unfortunate situation. When a sole director passes away, the family of the deceased are not only dealing with personal grief but also the financial pressure and time consuming legal minefield of probate. We are pleased that with our intervention, and the brilliant efforts made by the directors family, we not only paid creditors more than was originally estimated, but also brought the matter to a close quickly which in turn relieves the family of some of the financial burden.

We can appreciate that there are likely to be many businesses that could find itself in this position if the director/shareholder was suddenly incapacitated. There are a few key points that we would recommend a business should review regularly in an attempt to stop a complete breakdown of the business.

  • Is the majority of the company’s knowledge in the head of the director? We are now in a technological age, are there backups in place for computer/software passwords, banking access etc
  • Together with professional advisers, check the company’s articles. Are there provisions for the death of a shareholder/director?
  • Does the business owner have a will and within that does this mirror the company’s articles as to what would happen with the shares of the company?
  • Is there an opportunity for succession planning? How is the current director/owner going to exit the company? This does not just relate to illness but is a great point generally for business owners. Many people believe that it is worth considering your exit strategy at the same time that you are starting a business.

AUTHOR: Stewart Goldsmith (Associate Director at Portland)