Death of a sole director and shareholder: How a company should proceed in Sri Lanka

In Sri Lanka, when the sole director and shareholder of a business dies, several legal and administrative steps need to be taken to address the situation together with reputed company secretaries in Sri Lanka. Here are the key steps and considerations:

1.      Probate and Administration of Estate:

·         The deceased person's estate must go through probate. This involves the court process of validating the will (if there is one) and appointing an executor or administrator to handle the estate, together with a corporate lawyer in Sri Lanka.

·         If the sole director and shareholder had a will, the executor named in the will takes charge of administering the estate, which includes the business.

·         If there is no will, the court appoints an administrator, often a close family member, to manage the estate.

2.      Transfer of Shares:

·         The shares of the deceased will be transferred according to the will or the rules of intestacy (if there is no will). This transfer of shares will typically go to the beneficiaries named in the will or to the legal heirs as per intestate succession laws.

3.      Appointment of New Director:

·         The new shareholder(s) (beneficiaries or legal heirs) must appoint a new director or directors to manage the company. This is usually done through a resolution passed by the new shareholders.

·         The company’s articles of association and the Companies Act in Sri Lanka govern the procedure for appointing new directors.

4.      Company Operations:

·         During this transition period, the company may face operational challenges, especially if there is no immediate replacement for the director. It is crucial for the executor or administrator to act swiftly to minimise disruption to the business.

5.      Legal and Regulatory Compliance:

·         The company must notify the Registrar of Companies about the change in directorship and shareholding. This involves filing the necessary forms and documents with the Department of Registrar of Companies, which will be done by the company’s appointed corporate law firm in Sri Lanka.

·         The company must also ensure that it remains compliant with all statutory obligations, including holding necessary meetings, maintaining proper records, and filing annual returns.

·         Continuity of Business:

·         To ensure business continuity, the executor or administrator should work closely with the company's management and employees, if any, to keep the business running smoothly during the transition.

·         The new director(s) should be chosen based on their ability to manage the business effectively and maintain its operations.

By following these steps, the business can navigate the transition period after the death of its sole director and shareholder, ensuring that it continues to operate and that the deceased’s estate is properly managed and distributed.

How should a company in Sri Lanka proceed when this happens?

When a company faces the death of its sole director and shareholder, it should follow a structured process to ensure continuity and compliance with legal requirements. Here are the steps the company should take:

1.      Notify Relevant Authorities:

·         Registrar of Companies: Notify the Registrar of Companies about the death of the sole director and shareholder. This is usually done by filing a death certificate and the necessary forms.

·         Bank and Financial Institutions: Inform the company's bank and any financial institutions about the death to manage the company's accounts appropriately.

2.      Probate Process:

·         Executor or Administrator Appointment: If the deceased had a will, the executor named in the will needs to apply for probate. If there is no will, an administrator needs to be appointed by the court to manage the estate.

·         Probate or Letters of Administration: Obtain probate or letters of administration to legally manage and distribute the deceased’s estate, including their shares in the company.

3.      Transfer of Shares:

·         Identify Beneficiaries: Determine who the beneficiaries or legal heirs of the shares are, according to the will or intestate succession laws.

·         Share Transfer Process: Execute the transfer of shares to the beneficiaries or legal heirs. This involves updating the company’s share register and issuing new share certificates.

4.      Appointment of New Director(s):

·         Shareholders’ Meeting: The new shareholder(s) should convene a meeting to appoint new director(s). This can be done via a resolution passed by the shareholders.

·         Board Meeting: Hold a board meeting to officially appoint the new director(s) and update the company's records accordingly.

5.      Update Company Records:

·         Registrar of Companies: File the necessary forms to update the company records with the Registrar of Companies, including the new director(s) and any changes in shareholding.

·         Company's Records: Update the company’s internal records, including the register of directors, register of members, and minute books.

6.      Operational Continuity:

·         Management Transition: Ensure a smooth transition of management responsibilities to the new director(s). This includes informing key employees, suppliers, and customers about the change.

·         Review Company Policies: The new director(s) should review existing company policies and procedures to ensure they are up-to-date and compliant with current laws.

7.      Legal and Financial Review:

·         Legal Compliance: Ensure that the company remains compliant with all statutory obligations, including holding annual general meetings, filing annual returns, and maintaining proper financial records. For this you should make sure that you have the support of the best law firm in Sri Lanka handling such matters.

·         Financial Management: The new director(s) should review the company’s financial status and make any necessary adjustments to budgets, plans, and financial strategies.

·         Communication:

·         Internal Communication: Communicate the changes to employees and stakeholders to ensure they are aware of the new management and any potential impacts on their roles or the company’s operations.

·         External Communication: Inform clients, suppliers, and other business partners about the change in management to maintain trust and continuity in business relationships.

With the above, the company can effectively manage the transition period after the death of its sole director and shareholder, ensuring that the business continues to operate smoothly and remains legally compliant.

Things to keep in mind during such transition period

During the transition period after the death of the sole director and shareholder of a company in Sri Lanka, there are several important considerations to keep in mind to ensure a smooth and legally compliant transition. Here are key aspects to consider:

1.      Legal Compliance:

·         Timely Notifications: Ensure timely notification to the Registrar of Companies and other relevant authorities about the death and subsequent changes in directorship and shareholding.

·         Probate and Letters of Administration: Promptly initiate the probate process or obtain letters of administration to manage the deceased's estate, including company shares.

2.      Operational Continuity:

·         Interim Management: Consider appointing an interim manager or director to oversee daily operations and make critical decisions until a permanent director is appointed.

·         Employee Communication: Keep employees informed about the situation to maintain morale and productivity. Reassure them of the company's stability and continuity.

3.      Financial Management:

·         Access to Bank Accounts: Ensure the company retains access to its bank accounts. This may require the executor or administrator to provide documentation to the bank.

·         Review Financial Status: Conduct a thorough review of the company's financial status, including cash flow, debts, and obligations. Ensure bills and salaries are paid on time.

4.      Stakeholder Communication:

·         Clients and Suppliers: Inform key clients, suppliers, and business partners about the transition to maintain trust and business relationships.

·         Shareholders and Investors: Communicate with shareholders and investors about the transition plan and how the company will continue to operate.

5.      Appointment of New Director(s):

·         Eligible Candidates: Identify and appoint qualified individuals as new directors who can effectively manage the company and understand its business.

·         Documentation: File the necessary documents with the Registrar of Companies to officially record the appointment of new directors.

6.      Share Transfer Process:

·         Accurate Records: Ensure the share transfer process is accurately documented, including updating the company's share register and issuing new share certificates.

·         Legal Requirements: Follow all legal requirements for the transfer of shares according to the will or intestate succession laws.

7.      Corporate Governance:

·         Board Meetings: Schedule regular board meetings to discuss the transition, make strategic decisions, and ensure corporate governance standards are maintained.

·         Policies and Procedures: Review and update company policies and procedures to reflect any changes in management and operations.

8.      Risk Management:

·         Insurance: Review the company's insurance policies to ensure adequate coverage during the transition period.

·         Contingency Planning: Develop contingency plans for potential risks or challenges that may arise during the transition.

9.      Compliance with Statutory Obligations:

·         Annual Returns and Reports: Ensure the company continues to file annual returns and other statutory reports on time.

·         Tax Obligations: Maintain compliance with tax obligations, including filing tax returns and paying any due taxes.

10.  Professional Advice:

·         Legal Counsel: Seek advice from legal counsel to navigate the probate process, transfer of shares, and compliance with corporate laws.

·         Financial Advisors: Consult with financial advisors to manage the company’s finances and ensure fiscal responsibility during the transition.

By keeping these considerations in mind, the company can navigate the transition period effectively, ensuring continuity of operations, compliance with legal requirements, and stability for employees and stakeholders.