In terms of section 7 of the Companies Act, No. 71 of 2008, as amended (“Companies Act“), one of the purposes of the Companies Act is to promote the South African economy by encouraging entrepreneurship. There are many thriving companies in South Africa started by ingenious entrepreneurs. These entrepreneurs are, by default or design, mostly sole shareholders and sole directors of these companies. Decision making in respect of these companies is centralised in one person who is a sole shareholder and a sole director. If not managed properly, the death of that person may cause serious business continuity risk to companies and negatively affect the estate of the deceased and the funders and suppliers of the company.
Why is this an issue?
Once a company has been registered, it exists as a legal person independently of its incorporators, shareholders and directors until it is deregistered in terms of the Companies Act.
Each company is regulated mainly by the Companies Act and its memorandum of incorporation (“MOI“).
In terms the Companies Act, a person ceases to be a director when they die. In terms of the law, if a shareholder who is a natural person dies, his or her shares become, by operation of the law, part of the aggregate of the assets and liabilities of the deceased which are collectively referred to as the deceased estate.
In terms of the Administration of Estates Act, No. 66 of 1965, as amended (“Administration of Estates Act“) deceased estates cannot be distributed without letters of executorship, or otherwise subject to the discretion of the Master of the High Court (“Master“). The Master appoints an executor in terms of the Administration of Estates Act to distribute the assets and liabilities (estate) of a deceased person. If the deceased left a valid will that specifies the executors, the Master issues letters of executorship to those specified executors. If there is no will, the executor is chosen by the Master.
Notwithstanding that a company is a legal person, it can only act through its directors. Therefore, once a sole director has died, a company becomes incapacitated until a replacement director is appointed. If the sole director is also the sole shareholder, unless the MOI of the company provides otherwise, there would be no person who may immediately appoint a replacement director since directors are generally appointed by shareholders. This problem is compounded by inordinate delays in the bureaucratic process of the appointment of executors by the Master. This takes more than three months.
Notwithstanding that the deceased may have left a will, if a sole shareholder and sole director dies and such risk is not dealt with in the MOI of the company, the company will be unable to conduct business and this will have a negative effect on business continuity. Financial institutions generally ‘freeze” bank accounts where a sole director has died. The affected company therefore becomes unable to pay salaries or other operational costs until a replacement director is appointed.
In this note, we –
- analyse the judgment of –
- the England Wales High Court (“England High Court“) in Kings Court Trust Limited and others v Lancashire Cleaning Services Limited  EWHC 1094 (CH), (“Lancashire Limited Judgment“); and
- the High Court of South Africa, Western Cape Division (“Cape Town High Court“) in Ellis v Saga Wine Farms Proprietary Limited and Others  ZAWCHC 48 (“Saga Wine Farms Judgment“); and
- identify lessons from these judgments that are beneficial to businesspeople who are sole shareholders and sole directors of companies, alternatively funders and suppliers to the affected companies.
What happened in the Lancashire Limited Judgment?
Mr Eric Anthony Pilling (“Pilling“), the sole shareholder and director of Lancashire Cleaning Services Limited (“Lancashire Limited“), died. He left a will that appointed executors to administer his estate. However, the articles of association of Lancashire Limited (an equivalent of an MOI in South Africa) did not authorise the executors to appoint a new director. Therefore, the company faced a risk of inability to pay salaries and outstanding taxes. Lancashire Limited was also incapable of entertaining an attractive offer received by the executors for the acquisition of the Lancashire Limited business.
To deal with imminent business continuity risks, the executors of Pilling’s estate applied to the England High Court on an urgent basis for an order in terms of section 125 of the UK Companies Act, 2007 that the company register of Lancashire Limited be changed to include the names of the executors as shareholders, which would then enable the executors to pass a resolution as shareholders and appoint a new director.
In granting the order sought, Judge Hodge QC said:
- “The circumstances of this case are quite exceptional. There is no power, without the intervention of the court, to enter the executors in the register or for any director to be appointed in place of the now sole deceased director. There is also no company secretary. In those circumstances, and given the imminent failure to be able to draw sufficient funds to pay wages and salaries to employees and to account for unpaid value added tax due … it is inappropriate to wait until the grant of probate has been obtained. Section 125(3) recognises that a court may, on an application under section 125, decide questions relating to the title of someone in the position of the present claimants.” [Emphasis added];
- “In my judgment, in the exceptional circumstances of this case, it does seem to me that unnecessary delay is taking place in entering the names of the named executors on the company’s register of members. The company is presently completely directionless, with no officer capable of acting on its behalf. It is only the court that can rectify that situation by ordering rectification of the register. Normally the company should await the grant of probate; but, in this case, it may be too late for company if it does.” [Emphasis added]
- “In the circumstances of this case, which I repeat are wholly exceptional, and in order to ensure the survival of the company, I am satisfied that the court can and should exercise its power under section 125 of the 2006 Act to order rectification of the register.” [Emphasis added]
It was easier for the England High Court to exercise its discretion to grant the order in favour of the executors because Pilling had a will. If Pilling did not have a will, the outcomes would have been different and Lancashire Limited would probably not have been rescued from the business continuity risks.
The remedy pursued in the Lancashire Limited Judgment may also be pursued in South Africa based on the South African Companies Act (section 161) and the common law; however, that will depend on the facts of each case and the exercise of discretion by the relevant Court.
What happened in the Saga Wine Farms Judgment?
Ms Roza Galimovna Sagazidinov (“Roza“) who lived in Russia, Moscow, was the sole director and shareholder of a South African company called Saga Wines Proprietary Limited (“Saga Wines“). Roza died in 2013. She did not have a will dealing with the distribution of her shares in Saga Wines upon her demise.
Mr Daniel Jacobus Ellis (“Ellis“) was the financial manager of Saga Wines. Before an executor or curator was appointed by the Master to administer the estate of Roza, Ellis brought an urgent application in the Cape Town High Court seeking appointment as an “interim receiver” to take control of the business of Saga Wines pending the finalisation of the administration of the estate of Roza.
In dismissing the application by Ellis with costs, Judge Dlodlo said–
- “The problem with the relief sought by the Applicant (Ellis) is that it seeks to give him (and he is neither a shareholder nor a Director of the company) the power to conduct the affairs of the company: (a) Without regard for the provisions of the Companies Act, 2008 or the Articles and Memorandum of Association of the company; (b) In a manner not provided for or envisaged in either the Companies Act, 2008 or the Articles and Memorandum of Association of the company; (c) Without the Applicant being a director of the company; (d) Without regard for the rights of the shareholder of the company, which is the deceased estate of the late Roza and in whose deceased estate dominium in respect of the shares of the company vests.” [Emphasis added]
- “[T]he appointment that the Applicant in the instant matter seeks is: (a) An appointment which is not provided for in the Act [the Administration of Estates Act]; (b) Is one that is not subject to the supervision of the Master and in respect of which the Applicant will not be required to account to the Master; (c) Is one in respect of which the Applicant will not be required to give security to the Master for the performance of his functions; (d) Envisages the administration and dealing with an asset of the deceased estate (shares in the company) in a manner at variance with the way in which estates are dealt with in terms of the Act [the Administration of Estates Act].” [Emphasis added]
What does this mean for me?
The following are business continuity and estate planning lessons from the Lancashire Limited Judgment and the Saga Wines Judgment for businesspeople who are sole shareholders and sole directors of companies–
- ensure that the MOI of the relevant companies adequately cater for your death in a manner that will be suitable for the future of the said companies. The majority of companies in South Africa are registered using standard MOIs; these MOIs would be insufficient to efficiently deal with the demise of the sole shareholder and the sole director and would require amendment;
- prepare a will that include provisions dealing with the appointment of executors, the distribution of shares you own in companies and the appointment of replacement directors, and ensure that such will is not inconsistent with the MOI of the relevant companies; and
- have an effective succession plan in place to ensure that, if you so wish, the relevant companies will continue operating efficiently even after your demise.
Business continuity is also a risk for funders and suppliers of companies with sole shareholders and sole directors. Therefore, funders and suppliers must also ensure that risks identified in this note are managed by the sole shareholders and sole directors of the companies they finance or supply with products or services. This will ensure that repayments in respect of loans and payments for goods or services supplied is not compromised by the death of a sole shareholder and sole director.