The case of Williams v Russell Price Farm Services highlights the issues that can arise after the death of a director and shareholder of a family business. We look, below, at the case and then turn to some practical points arising from it.
Russell Price created a successful business of which he was the sole shareholder and director. He left a valid will in which he left the bulk of the shares in the company to his son and daughter.
To break the financial deadlock, the executors urgently needed to appoint new directors. However, under the company’s articles of association, only existing members on its register could appoint new directors - and the only member was the late Mr Price. This, then, was not an option.
Mr Price had died at a particularly busy time of the farming year and wages, debts and taxes were payable, but as a result of Mr Price’s death, the company’s bank account had effectively been frozen until probate could be granted.
Usually, executors will be appointed as shareholders after the Grant of Probate is obtained which can take some time (usually 4-8 months). To keep the business alive, an alternative solution was urgently needed.
The directors of the company applied to court under the Companies Act 2006 for the register of members to be amended to include the executors. This then allowed them to be appointed as directors and to start active management.
This was unusual because the executors did not yet have a grant, but the court was satisfied that irreparable damage would be done to the company if the appointment was delayed.
However, the order was not without some important caveats, including an unconditional requirement that the executors had to pay any inheritance tax due (as opposed to a more limited undertaking allowing them to pay all taxes from the estate as required).
While the executors were able to accept these terms – primarily due to the availability of Business Property Relief which reduced the tax liability – agreeing to an undertaking in these terms (and an acceptance, as the judge said, of “a personal risk”) may have caused a degree of unease on the part of the executors.
Our reflections on the judgment
In this case, a solution was found. The cost of the court application would, of course, not have been insignificant. Fortunately, the application was not opposed by any party, which could have caused further delay and expense.
A technical point had important ramifications. Because Mr Price had executed a will, he had executors (though they did not have a grant). An executor’s authority derives from the will, so the executors could be added as members before a grant had issued. If Mr Price had died without a will (i.e. intestate), his administrators would have been in a different position and finding a sensible solution could have been even more difficult.
This case highlights the importance of approaching estate planning in the round. Simply because one has taken the very important step of putting a will in place and reviewing it regularly does not mean that one cannot consider the other effects of one’s death, including the possibility of an unexpected death.
Where a business forms part of an estate, the effect of one’s death on that business should be considered. The type of organisation, be it sole trader, limited company or, indeed, partnership, will have different consequences when a key director or owner dies.
Any plans already made or assumptions about what will happen should be stress-tested. It will not surprise you to hear that most lawyers will agree with the adage: “a stitch in time saves nine”.
“Key person planning”
Some practical tips for company owners and ‘keyman’ directors are:
1. Put a will in place or review your existing one. Obtain proper legal advice on this and ensure that your adviser is aware of your interest/role in your company. Incidentally, simple and/or “do-it-yourself” wills are always appealing for the purse-strings, but the effects of an inadequate will can be serious and far reaching for one’s business, friends and family. Click here to see our previous article.
2. Any wishes included in one’s will as to business succession will need to be stress-tested against the company’s rules (e.g. the partnership deed or the company’s articles). Consider who your business interest will be transferred to and, in line with the case discussed above, how that transfer will happen. Discuss this with your legal adviser.
3. You might be a keyperson in terms of your knowledge of the business and its operations and your expertise. Consider whether the risk of your death or incapacity can be mitigated in some way. Training an employee, having an open and frank discussion with co-directors or employees, or educating a successor is an obvious way of reducing this risk. Likewise, you might consider it appropriate for your professional advisers to have details of key company information and operational details which could be provided to your co-directors and/or executors.
4. Think about the practical and immediate consequences for the business if you were to be incapacitated in some way or in the event of your death, and whether any changes should be made to the company’s memorandum and articles of association to ensure the company is not left in the lurch. The sooner these issues are reviewed, the better. That way they can be addressed in a considered, stress-free way and all concerned can then get on with daily life safe in the knowledge that there is a contingency plan should the worst happen.
This article has focused on the unexpected death of a business owner. However, similar issues arise in relation to the unexpected loss of mental capacity for a company director.
If you have any questions about this article or would like to discuss any of your own estate and business contingency planning, please do get in touch with Richard McDermott, Adam Carvalho, Joshua Pugsley or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2020