Diane Pearce

For many owner-managed businesses, operating as a company with a sole director and sole shareholder feels simple, efficient and entirely logical.

However, beneath that simplicity lies a series of legal and practical risks that can leave the company — and the people relying on it — completely stuck. Recent case law has provided some clarity, but it hasn’t eliminated the uncertainties, and a company cannot operate without at least one director. Unless the Articles of Association are drafted with these issues in mind, the consequences can be costly, disruptive and, in some cases, impossible to fix without court intervention.

In this blog, we explore the key risks and highlight why early planning is crucial.

Conflicting Case Law on Sole Director Decision‑Making

One of the most significant risks arises from long‑standing uncertainty about whether a company with a sole director can validly make decisions if the Articles require a quorum of two directors, and whether the Model Articles (often adopted and unmodified by companies) are sufficient.

While the KRF Services (UK) Ltd [2024] EWHC 2978 (Ch) decision offered helpful guidance, it did not resolve all ambiguity following past case law and High Court decisions. If the Articles haven’t been updated to expressly allow sole‑director decision‑making, the company may technically lack the power to act at all.

This can call into question the validity of decisions on:

• appointments of new directors,
• share transfers,
• contracts,
• banking authority,
• and day‑to‑day management.

However, the judgment in KRF provides a useful benchmark for sole‑director decision‑making and the powers around sole directorships.  The issue arises when a sole director dies. Under the Model Articles, a director can be appointed, but only if the executor or administrator has the legal standing to appoint a replacement.

When the Sole Director Is Also the Sole Shareholder

The risks increase when a company has a sole director, who is also the sole shareholder. If that individual dies or becomes incapacitated, a legal vacuum can quickly arise.

Although the deceased’s will may specify who should inherit the shares and the executors can be registered, the company can still be paralysed if the Articles do not:

• allow a personal representative to be entered as a member, or
• permit a new director to be appointed by someone other than the existing director (who is now deceased).

Without a will, this falls to a grant of probate / letters of administration which can all take time.

Under article 17(2) of the Model Articles, the executor/administrator of the shareholder who has died can appoint, by notice in writing, a person to be a director. However, if there is no director to admit the shareholder as a member, executors or administrators do not have sufficient powers to update the register of members.

Without these powers, no one has the legal authority to operate the company — not even to admit the beneficiary as a shareholder.

Frozen Bank Accounts and Inability to Operate

This legal limbo is not just theoretical. It is increasingly common to see banks freezing company accounts when the sole director/shareholder dies.

Banks understandably require properly authorised signatories. If no one has authority according to the company’s Articles:

• salaries cannot be paid,
• invoices cannot be settled,
• suppliers may suspend services,
• insurance may lapse, and
• the business may grind to a halt.

This can have huge consequences for employees, customers, and family members — particularly where the company is the main income source.

Court Applications: Slow, Expensive and Entirely Avoidable

If no one can be admitted as a new member or appointed as a director, the only solution may be a court order.

Court applications to rectify corporate governance issues are:

• expensive,
• time‑consuming, and
• stressful for families already dealing with a bereavement.

Many businesses remain unaware that a simple update to the Articles could prevent this situation entirely.

Top Tips

Our top tips to avoid the above scenarios are:

• ensure the company has more than one director and shareholder;
• update the company’s articles of association to expressly authorise sole‑director decision‑making, clarify quorum rules and allow the appointment of a new director if the sole director dies;
• have a will in place that aligns with any provisions in the company’s articles of association.

We’re Here to Help

If you are in any doubt or would like clarity on whether your company’s articles of association are fit for purpose, please get in touch with us.

We also strongly recommend you get a will drawn up and seek advice on business planning. Planning ahead now can prevent significant complications in the future.