This case study highlights the importance of succession planning in business.
The Director’s husband of this small financial intermediation company died suddenly in tragic circumstances. She had no involvement in the business and did not really understand the business formula. It was run by her husband entirely – he was the key person and sole holder of all business information. They intended to appoint him as director and for her to resign. Yet, they had never found the time to do so. The Director was separated from her husband for some time, but the divorce proceedings were not yet commenced. He left no Will.
Shortly before his death, the client’s husband employed In-house Counsel who also acted as Company Secretary and was named on Companies House in that capacity.
Company Secretary was informed of his death by a senior employee. There were 13 employees in total and the death occurred 5 days before the payroll date. All company information was either in hand-written notes made by the deceased or in his head – he ran the payroll manually as well as making all business transactions from his laptop.
It fell upon the Company Secretary (AW) to address this crisis. She contacted the deceased’s wife who, in the absence of any Will, was the sole beneficiary of the deceased’s estate. She was also the sole shareholder and held fiduciary duties as the Director. Personal belongings and company records were released to the widow by the police. The widow had to rapidly familiarise herself with the business and take control of it.
The situation became even more complicated when the following issues arose within days of her husband’s death:
Significant funds were transferred from the business account to a third party by an individual who was close to the deceased and was his close business associate.
The said third party made an offer to the widow to buy the company and appointed a firm of solicitors, who also purported to be acting on behalf of the employees. Payments to the solicitors were incredibly made from the company’s bank account.
Two employees have conspired to set up a company in competition. This, in itself, was not the biggest problem as the widow did not have any interest in continuing with the business and was not concerned about the competition. The problem was that the employees intended to do so out of the company’s funds to which they were of course, not entitled.
The company was an introducer to several major financial institutions and was subject to Introducer Agreements. These stipulated clawback clauses (i.e. the commission needed to be repaid) in cases when the lead provided cancelled their financial product within a certain period. The death of the key person caused many leads to cancel their products, resulting in vast amounts due to the product provider.
The Company Secretary needed to act very fast to ensure that the company’s obligations are met and that company funds were not depleted.
The Director and the Company Secretary took control of the company’s bank account. This was achieved by putting the opponents on notice of impending injunctive proceedings and intense communication with the bank.
The sums taken by the third party and paid to their solicitors were returned after being presented with pre-litigation correspondence.
Employees were paid on time and were made redundant in an orderly fashion.
Hostile take-over by employees was prevented
The company’s debts were discharged and accounts prepared, enabling the Director to dissolve the company voluntarily.
It took four months to complete the above objectives. The widow was able to wind the company down in an orderly fashion.
Let us imagine this – there was no Company Secretary appointed on Companies House. In the absence of an appointed company officer with authority to deal with the company’s affairs, it would have taken the widow some time to take control of the bank accounts. This would have likely resulted in accounts being depleted and potentially in breach of contract claims presented by employees and suppliers. By the time the widow took control of the company, she would have had to deal with multiple claims.
Another scenario is when a sole director and shareholder of a limited company dies, leaving no Will. If that was the case, and the deceased was the company director – his wife would have needed to obtain a Grant of Probate and Letters of Administration before being able to appoint another director. This can be a lengthy process. During that time, the assets of the company would generally be frozen. However, in this case, it would have likely resulted in multiple complex legal issues.