Corporate governance has become one of the most hotly debated topics in recent years. Whether it be board diversity, corporate culture or succession planning, directors across the world have hugely diverse opinions. But what happens when there is no-one to steer the ship?
Companies with sole directors, members, resident agents and company secretaries are less frequently encountered, but cannot be left "in limbo" if the worst is to happen and the sole individual holding those roles dies. Without someone to progress the company's interests, bank accounts are likely to be "frozen", regulatory filings missed and the viability of the substantive business threatened.
This was the novel conundrum facing Guernsey's Royal Court in a recent application brought by Appleby on behalf of an executor. The estate's assets included a number of companies, many of which were left without a director, member, resident agent or company secretary upon the untimely death of their founder. The companies' articles of incorporation (Articles) did not provide for updates to the share registers in these situations.
The Court was asked to exercise for the first time, jurisdiction to rectify the companies' share registers to enable the executor to be listed as a "member". The executor could then exercise rights as a "member", taking steps to appoint directors and company secretaries and otherwise regularise the standing of the companies.
Whilst s.290 of the Companies (Guernsey) Law, 2008 (as amended) provides for the valid transfer of shares by an executor, in the absence of a company secretary, the necessary formalities could not be complied with. The executor was left in something of an unenviable position. In the absence of any other statutory provision to assist, the executor relied on case law to seek the Court's assistance.
The case of Harlequin Chemicals Limited et al v Werner Urban and Anthony Saville et al (Harlequin) confirmed that the Royal Court of Guernsey has jurisdiction to amend the share register of a company in various situations. However, none of the previous cases had envisaged a situation where companies were left "in limbo". The Court was therefore asked to confirm that the scope of the jurisdiction could be extended, or alternatively, that it encompassed an ability to rectify the share register in circumstances where there was no-one to fulfil that role and the Articles of the company did not provide any assistance.
Previous Case Law
Harlequin was decided in 2016 and addressed the validity of the removal of a director in circumstances where a resolution of the shareholders transpired to be invalid on account of the fact that one of the shareholders was not recorded on the company's register of members at the time of the purported resolution.
Harlequin acknowledged that the rectification of a company's share register was a discretionary power of the Court (rather than something which an applicant could invoke as of right), only available in circumstances where there would be no "prejudice" to third parties. Whilst the Court reviewed English authorities covering a number of different situations in which the register might be rectified, it did not specifically address a situation where there was a complete absence of officers, resident agent, company secretary or members.
The Royal Court accepted in Harlequin that the concept of rectification of a Guernsey company's share register could be imported, following English law principles (on the basis that Guernsey company law was derived from, and based on, English company law). This was necessary as under English company law, the court has an express power to order the rectification of a company's share register, which is lacking in Guernsey's Companies Law.
The statutory provision was relied upon in the English case of Ellott v Cimarron UK Limited (Ellott), where the executor of a deceased shareholder brought an application for rectification of a company's share register in circumstances where the shareholder's death meant there was no-one able to progress the company's affairs. Notwithstanding that probate had not been granted, the Court recognised that the company's affairs would be prejudiced if urgent steps were not taken to preserve the viability of the business. It therefore ordered that the share register be updated and that the executor be authorised to do that, in the absence of any company secretary.
The Court's Decision
The Court accepted that it was necessary and appropriate for the executor to request that the Court exercise its discretion to order the rectification of the companies' share registers. Accepting that Harlequin provided it with jurisdiction to order rectification, the Court also accepted that following Ellott, it was appropriate to confirm that the scope of the jurisdiction included the current situation.
Whilst the remedy remains at the Court's discretion, the Court also confirmed that these were appropriate circumstances in which that jurisdiction should be exercised. In the absence of any officers or others to progress the companies' operations, the executor was also the appropriate person to update the registers. The Court noted the lack of any prejudice to any third parties and that delay could be detrimental to the companies, including the risk of being struck off due to a lack of directors/shareholders/resident agents.
The executor is taking steps to regularise the position of the companies, which will in due course be able to continue operating and trading as necessary.
The decision provides comfort to executors, heirs and other personal representatives, faced with the challenges of estate administration. Companies relying on one individual for their continued operation may hold assets of significant value and/or employ people whose livelihoods depend on the viability of the business.
The knowledge that there is a method of putting the companies' affairs back in "good standing", when faced with the challenge of the companies being left "rudderless" will be welcomed. It also serves as a further example of the Court's nimble and pragmatic approach, with the application being heard and determined in short order immediately before the Christmas break.
More widely, the matter also illustrates the importance of reviewing the Articles and/or governance of a Guernsey entity. In particular, attention should be given to the following:
- Is it appropriate to have a sole member, director and resident agent?
- Is there a separate company secretary?
- Do the Articles permit a personal representative to appoint a director?
- Who else has knowledge of the company and its business in order to ensure minimal disruption on the death/incapacity of a sole director/shareholder?
- Does anybody else have authority to operate bank accounts in the event of a sole director's death/incapacity?
- Do the Articles permit shares being left in a will to beneficiaries?
- If shares are held on trust, do the Articles recognise the validity of such a trust?
We recommend that in cases where companies are reliant on a single individual for their governance/operation, the Articles and/or the structure of the companies are reviewed to take account of the issues raised above. Anticipating potential problems in the future could save time, stress and money, if the "perfect storm" situation were to arise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.