Companies are seen as persons in the eyes of the law. This is due to the fact that they are separate entities, distinct from their shareholders and members. They have all the rights and powers of a natural person, in so far as those rights are applicable. This includes the power to enter into contracts, bring and defend actions and hold land in their own names.
It is obvious though that while the law recognises a company as a person, practically speaking, a company cannot think or act on its own. This must be done through at least one natural person whose thoughts and actions may be attributed to the company. This person is usually the director. In the ordinary course of things, the directors make the decisions as to which contracts to enter into, execute the deeds and sign the cheques; they are the directing mind and will of the company.
It can be argued that a company without a director is very much like a human without a functioning brain; it may still be alive but its functionality is significantly limited.
It is for this reason that the Companies Act, 2006 (the “Act”) mandates that all private companies must have at least one director. Theoretically, this requirement is reasonable but practically, there are situations that can arise that may result in a company not having a director.
The Sole Director Dies
The most obvious scenario in which a company can be left without a director is where the sole director of the company dies.
In order to have a new director appointed, a general meeting would have to be convened for that purpose. The Act requires at least 14 days’ notice to be given of the intention to convene the extraordinary general meeting. While the notice period may be waived by the members present and voting (provided that they represent not less than ninety-five per cent of the total voting rights) it is highly improbable that a general meeting will be convened on the same day that the director dies.
The situation is further complicated where the sole director who died was also the sole shareholder. The model Articles of Incorporation (the “Articles”), found at Table A of the Act, is often adopted by companies upon incorporation. It provides that upon the death of a shareholder, his legal personal representative [sic] shall be the only person recognized by the company as having any title in the interest of the shares. The reference to legal personal representative indicates that in order to make a claim to the interest in the shares, that person must first obtain either a Grant of Probate or a Grant of Letters of Administration.
After obtaining the relevant Grant, the legal personal representative may choose to be registered as the holder of the shares or to nominate a shareholder (most likely the beneficiary named in the Will of the deceased shareholder or entitled to benefit in the administration of the estate). The new shareholder would then have the power to appoint such number of directors as the Articles allow.
The Sole Director Is Of Unsound Mind
The model Articles provide that a director’s appointment will cease if he becomes of unsound mind.
The effect of the provision is that, at any time that the director is deemed by law to be of unsound mind, his directorship automatically ceases. If that person is the sole director, then the company is left without a director. The company may be left without a director for quite a while depending on how long it is before the members become aware of the director’s fate and how long it will take for them to convene a general meeting to appoint a new director.
Where the sole director who becomes of unsound mind was also the sole shareholder, the model Articles provide that his voting rights may be exercised by the committee or receiver that is appointed by the Court to manage his affairs. Such person(s) may exercise the voting rights for the purpose of appointing one or more directors.
Sole Director Resigns
The Act’s requirement that all private companies have at least one director has sometimes been interpreted to mean that the sole director of a company cannot resign until a replacement is found. That is not actually the case. The requirement to have at least one director is an onus that is placed on the company and not on any one director. Therefore, the director cannot be forced to remain a director.
Ideally, when the company is notified of the director’s intended resignation, it should convene a general meeting prior to the effective date of resignation for the purpose of appointing a new director. Realistically, this does not always happen and often times, the director’s effective date of resignation passes and no new director is appointed. The director’s resignation is not invalidated by the failure of the members of the company to appoint a new director. The company would therefore be left without a director until such time as the situation is rectified.
Whether the consequences that flow from the failure to have a director, both for the company and the director who last resigns and leaves the company “directorless”, are trivial or dire will depend on the length of time that the company is left without a director, the scale of the company’s activities and the company’s standing obligations at the time the office of director became vacant.
It is probably for this reason that the Act requires that public companies have at least three directors. Public companies tend to have many shareholders and employees who may be negatively affected by the lack of a directing mind and will of the company. By mandating that the company should have at least 3 directors, there is a lesser likelihood that at any time the company will be left without a director.
Chantal Simpson is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Commercial Department. Chantal may be contacted via firstname.lastname@example.org or www.myersfletcher.com This article is for general information purposes only and does not constitute legal advice.