Why a will will protect your business
Advice from David Finnerty, associate in the inheritance protection team at Gardner Leader
THE importance of having a will is well documented. The courts are increasingly occupied with wills being challenged by various parties in a variety of circumstances. But the deceased may leave more than simple household assets and bank accounts.
Many businesses give little thought to a director or shareholder dying.
They are then caught out when the unforeseen becomes reality.
The resulting problems are not exclusive to the company; the deceased’s loved ones can also be left with unwanted issues to contend with.
Problems can arise over shares held by the deceased.
In the absence of an overriding agreement, such shareholding would pass under a will (or the intestacy rules when no valid will exists).
This can be to the detriment of the company, the deceased’s beneficiaries, or both.
Imagine the dissatisfaction where a beneficiary could demand dividends but make no contribution to the company.
A new shareholder may feel aggrieved that the other shareholders are not prepared (or cannot afford) to purchase their shares.
This is worse if theirs is a minority shareholding, which would significantly reduce their open market value.
The deceased may have provided funding to the company.
As a creditor, this ‘asset’ would form part of their estate.
The terms on which loans are made are often not properly documented, which would assist if disputes did arise.
Depending upon the value of the loan and the availability of capital to repay it, this could cause financial problems to the company.
In the current financial climate, lenders require substantial security over loan facilities.
The requirement for directors to personally guarantee liabilities of the company is all but the norm.
The death of the guarantor is often a ‘trigger event’ under such guarantees, allowing the lender to demand repayment of the debt.
This would impact both the availability of the loan facility to the company, as well as the estate of the deceased which may have to settle the guaranteed amount.
Further potential problems await the ‘one-man band’ – the sole shareholder and director.
With no surviving directors to deal with creditors, such companies often ‘expire’ and are struck off at Companies House.
However, major creditors will rarely write off significant debts.
This can result in claims against the company, as well as potentially unpleasant investigations into the deceased’s execution of
director’s duties owed to company creditors prior to their death (in an attempt to establish personal liability against them and a potential claim upon their estate).
So what can businesses do to protect themselves?
1. Consider these issues now. They may seem unlikely and easy to leave for another day, but the consequences of being unprepared can be significant. Set aside time now to consider all possibilities, no matter how unlikely they may seem.
2. Document everything. Laborious at times, the importance of documentary evidence, such as shareholder agreements and confirmation of director’s loan terms, cannot be overstated.
3. Consider insuring against the risk. Key-man life insurance polices can be taken out on the lives of important individuals. This could cover the value of any relevant liabilities to the bank, or the possible loss of profit their death may cause. Other
shareholders could take out a policy so as to be in a position to purchase shares of the deceased.
4. Take proper advice. Good legal advice on these issues is of the utmost importance. A review by a solicitor might reveal issues you simply had not considered, or give you peace of mind that you have covered all eventualities. They can give you all the necessary guidance to put any problems right, before it’s too late.
By David Finnerty, associate in the inheritance protection team at Gardner Leader solicitors in Newbury, Thatcham and Maidenhead. Follow @DavidF_GL and @GardnerLeader or contact Tel: (01635) 508080, www.gardner-leader.co.uk
