Can a private company have one director and one shareholder?
The short answer is yes. But careful consideration is needed. It is often the case, especially with small companies, that the shareholders and the directors are the same people. The people that set the company up, also run it day-to-day. If a company is set up by one person, it makes sense that they are also the sole director. However, this structure can create certain problems relating to the management of the company and it may prevent the company from being governed appropriately.
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The Model Articles
The model articles are the default setting for a private company limited by both shares and guarantee. Due to the requirement that all limited companies have articles of association, the Companies Act has prescribed a standard set to be used by those companies which don’t have their own bespoke articles.
Many limited companies will select the model articles on incorporation out of convenience. A limited company with a sole director must be careful here, as these default ready-to-go articles will never be appropriate for a company with only one director unless they are amended.
The model articles state that two directors must be present for a valid board meeting to take place. Unless the model articles are amended, they will be inappropriate for a sole director. Any decision taken by the sole director could be in breach of the articles and therefore invalid.
Lack of Accountability
Directors are there to run the company at ground level. They make the most decisions and will only involve the shareholders when big decisions need to be made e.g. changing the company’s name.
In a small company, the directors and shareholders may be the same people, and this distinction between the roles may be unnoticeable. Where there is a sole shareholder and director, this distinction may be even harder to see.
An important job for the shareholders is to hold the directors to account. For example, regardless of what powers are conferred or restricted in a company’s articles, the Companies Act will always provide shareholders with the power to remove a director. A company with a sole director and sole shareholder loses that layer of accountability which may prevent the company growing or performing.
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Conflict of Interest
Similarly, shareholders and directors have different interests. Shareholders can act wholly selfishly if they wish, and their interests can be completely aimed toward their own gain. Directors, in contract, have a legal obligation to do what is best for the Company. Where the shareholder is also the sole director, they may make decisions at board level which could be bad for the Company but good for their wallet. This could create a conflict and may even be a breach of the general duties owned by a director.
This conflict may become more pronounced if the company was to become insolvent or borderline insolvent. The directors must start to consider the interests of the company’s creditors and at certain points, such as when liquidation becomes inevitable, the creditor’s interests become paramount and rank above those of the shareholders.
What happens to the company on death?
A sole shareholder and director should also consider the future of the company once they are no longer around.
If a sole director dies, their appointment will automatically terminate, and business is likely to grind to a halt as there will be no one empowered to exercise all the powers of the company. Upon the shareholder’s death, title to the shares automatically vests in the deceased’s personal representative (PR).
If the company articles do not permit the PR to appoint a new director, then the process can be complicated. Even where the PR is willing to be registered as a member, if there are no surviving directors with power to accept evidence of the transmission, the PR cannot be put on the register of members. Without being a member, the PR will not have the right to vote or right to appoint a new director. As a last resort, the court can order a rectification of the register of members to replace a deceased shareholder with the PR.
We would recommend a sole director and sole shareholder review their articles to ensure they are suitable. HSR Law would be more than happy to assist with this. Sole directors should also consider whether it is appropriate for the needs of the company to be governed completely by one person.
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Contact the author
This article was written by Kingsley James, Solicitor in our Corporate and Commercial department. If you wish to discuss anything mentioned above, contact Kingsley below.