Estate Settlement of a Private Limited Business
Most Singapore companies are registered as private limited liability companies (commonly known as private limited companies). A private limited company is a separate legal entity and shareholders are not liable for the company’s debts beyond the amount of share capital they have contributed (hence the term “limited liability”). A properly structured private limited company in Singapore is a very tax-efficient corporate body, and hence this form is the most common type of business entity registered in Singapore.
On the flipside, a private limited company’s ability to be an ongoing concern and separate legal entity also causes the estate settlement of such businesses to be a challenging issue for legal representatives.
Unlike a sole proprietor or partnership, a private limited company is a separate legal entity. Therefore, when a shareholder dies (assuming this shareholder is also the key person of the company), the company can carry on operating.
Settlement of the Shares of Company
The most challenging and sensitive issue is the settlement of shares. Upon the death of a shareholder, the shares form part of his/her estate. The first task of the legal representative is to get hold of the shareholders’ agreement, and implement the terms (i.e. exit clause) of the agreement. The agreement would indicate the party to buy (usually the surviving shareholders), the party to sell (i.e. the estate), price of the shares and the source of funds to carry out this buy-sell (usually from a buy-sell life policy).
The issue is more challenging if there is no shareholders’ agreement. This might lead to a tussle between the surviving shareholders and the estate. The main contention will be the value of the shares and the funds (or the lack of it) for the surviving shareholders to buy out. The legal representative may need to engage a professional to do a share valuation.
In the absence of a shareholders’ agreement or buy-sell agreement, the estate can expect much dilution of the shares’ value.
Settlement of the Credit Facilities or Debts of the Company
It is common for a shareholder who is also director of the company to advance loans to fund the company’s capital. When the shareholder (director) dies, the loans to the company should be settled and returned to the estate. In cases where the company lacks the sincerity to settle the debt, the legal representative could sue the company.
It is also common for the business loans or credit facilities to be tagged onto the personal assets of the shareholder (director). The legal representative needs to arrange for such liabilities to be discharged.
Settlement of Profits Up to the Death of Shareholder.
The profits of the company up to the death of the shareholder should be properly dealt with by the legal representative of the estate. It is important that such matters be dealt with factually. For example, the legal representative could request for a copy of the company’s financial statements and seek a briefing together with the company’s accountant. As this involves the income of the deceased or estate, there will be tax issues to be sorted out.
Succession Issues - Fair rather than Equitable.
If there was a prior succession plan done, the legal representative can implement the plan and communicate to the beneficiaries based on the facts contained in the succession plan. This is because a fair succession plan does not necessarily mean an equitable succession plan amongst beneficiaries. For example, John has two sons, Peter and Tim. Peter has been working in the family business for 20 years, and Tim is a successful doctor in private practice. John might want to pass on the shares of the business to Peter entirely so that he can continue the family business; whilst Tim is being given other assets of Peter’s estate which might not be as valuable as the family business. In this case, Tim might see this as “unfair”. But if the family business shares are being partially given to Tim, it will not be fair to Peter who worked hard in the business for Tim to collect dividends as a non-management shareholder. This might result in the collapse of the family business due to an internal dispute between shareholders.
Liquidation Issues – If No Succession Plan
If there is no prior succession plan done, no person that can run the business profitably, and the surviving shareholders and employees are not willing to cooperate with the successor, it would be better for the legal representative to liquidate or wind down the company. Otherwise, the loss of the business could spread to the estate assets because of personal pledging of assets into the business.
Some private limited companies are centred on one professional, for example a doctor. In such situations, it would be better to liquidate the company when the professional dies. This is because it would be difficult or even impossible to have a succession plan in such situations.
In winding down the company, the legal representative needs to pay attention to the settlement of account receivables and payables issues as described in the article regarding the Estate Settlement of Sole Proprietor Businesses.
Communication to Stakeholders
The estate settlement of a private limited company can be a time consuming process, and there will be lots of negotiations, counter offers and procrastinations from various stakeholders. Therefore, it is important that the legal representative constantly keeps the beneficiaries updated about the situation, and, if need be, make adjustments to expectations and move on.