Succession planning: business continuity after death
Have you taken steps to ensure your business could survive without you? Sarah Cornish, Partner and Head of Coodes Solicitors’ Wills, Probate and Trusts team and Kirsty Davey, Partner in the Corporate and Commercial team, comment on a recent High Court case.
A recent High Court case involved a farm contracting business, which nearly failed following the owner’s death due issues with the corporate structure. It demonstrates the potentially catastrophic impact on the future of a business if the business structure does not allow the owner’s wishes, set out in the Will, to be fulfilled.
A company’s articles of association sets out the basis on which a company may operate and details the responsibilities of the directors and their relationship with shareholders.
A High Court case: Russell Price Farm Services
Russell Price was the sole member and director of Russell Price Farm Services, which after his death had no directors or living shareholders. The deceased left his shares in the business to his son and daughter, who were the executors named in his Will. However, the company’s articles of association did not permit the executors to vote in respect of the shares while they remained registered in Price’s name and as such did not enable them to appoint a new director.
Mr Price died in March. It was particularly important for the business to be able to operate during the spring, which is the peak time for it to hire farm machinery for planting crops. So, to try to keep the business running at a busy time of year, the executors applied for an order to rectify the company’s register of members and replace the deceased’s name with their own. They had not applied for probate of the Will because they had not yet gathered the information needed to complete an inheritance tax return.
The business was in limbo, unable to pay creditors or fund its day-to-day operations, and at real risk of failing. It took an expensive High Court action to enable the position to change. . This could have been prevented prior planning and procedure being included within the Articles.
Do your articles of association enable your executors to act?
This unusual case highlights the importance of ensuring your company’s articles of association enable your executors to act on your death and not to have to wait to get probate. If the executors in this recent case had had the power to be appointed as shareholders or to appoint a new director they would have been able to keep the business running. The situation was exacerbated in this case due to there being no grant of probate, the executors were also asked to cover any potential liability as a result of the action.
It can take many months to secure grant of probate. Therefore, a starting point is to ask yourself if your business could survive for up to six months without you. Would the business be able to continue to pay its workers, suppliers and fulfil customer orders?
Does your Will complement your articles of association?
Many of our corporate clients separate out their wishes for their private and business assets, but tying the two together is vital when it comes to planning for the future. It is common to assume that because a Will is in place, everything is in order. However, there could be an important missing link.
An experienced corporate lawyer can examine your company articles and your Will to ensure they fit together. As with the recent High Court case, the wishes you have set out in your Will may not in fact be possible because of the way your articles of association have been drafted. Once they are in place, it is important to keep these documents under review and ensure they remain up to date as your business and personal lives change.
The importance of early succession planning
Business owners often look at succession as something that will happen many years or decades into the future. The truth is that none of us knows when these plans will become reality. Whatever your age, if you own a business it is important to consider who you could involve now at a management level. You may also wish to put in place a Business LPA to enable a trusted individual to act on your behalf should you become unable to do so.
Thankfully, situations such as the recent case involving Russell Price Farm Services, are rare. However, when they do occur they are incredibly difficult to resolve. There is generally not a quick fix and there is sometimes nothing that can be done to prevent a business from failing.
Investing in legal advice now could avoid everything you’d planned for the future of your business and for your family being completely washed away.
For advice on any issues raised in this blog, please contact Sarah Cornish in Coodes Solicitors’ Wills, Probate and Trusts team on 01579 325793 or firstname.lastname@example.org or contact Kirsty Davey in the Corporate and Commercial team on 01326 214034 or email@example.com.