Does a company with two shareholders become a single shareholder company on the dissolution of one of those shareholders?
Such was the question before the Courts recently.
Father and son were directors of a company (A Limited). The son owned 75% of the shares in A Limited. His father owned 25% through his own company, B Limited.
Father resigned as a director of A Limited. He also dissolved B Limited. The shareholders register of A Limited was not updated after the dissolution had taken effect. The records of A Limited showed the shareholders remaining one individual (the son) and a (now) non-existent company.
The son (understandably) conducted the business of the company as if it were a single member company with a sole director. As a company owned and operated by one person, there is greater flexibility in decision making: failure to follow formalities can be ratified by the sole shareholder.
The articles had not been reviewed in the light of the sole shareholder status. They required a quorum of two directors for board meetings. Where the company had only one director, the articles allowed a reduced quorum of one but only to fill a vacancy or to call a shareholder meeting. A decision was taken to appoint administrators. The decision was taken by the sole director, ostensibly supported by the sole shareholder (ie himself).
The company’s dealings found their way into the courts. The court held that the register of members of A Limited remained the sole reference point for determining who should be involved in the decision process “whether alive or dead”.
The failure to update the shareholders register had far reaching implications.
- The company was not a single member company. Even though B Limited had been dissolved, the register did not record that fact, nor was it clear what had happened to the shares owned by B Limited. The benefit of those shares resided somewhere, potentially the Crown.
- The son could not operate the company as flexibly as he thought he could. The majority of the decisions taken by the sole director could not be ratified by that same individual (as shareholder) alone.
- The appointment of administrators was invalid. The costs of appointment were therefore wasted.
- The proper administration of a company was not able therefore to proceed, causing significant delay.
- Any dividends to shareholders in the administration would have been void.
It is critical that shareholder registers are maintained up to date. If there are any doubts over the register or indeed any part of the company books, specialist help is available at Stephens Scown.