Can a private limited company have a sole shareholder who may also be the sole director? If so, would the company still be regarded as a separate legal entity?

Yes,  a sole shareholder can be the sole director of a private limited company.  A private limited company must have at least 1 natural director. The sole shareholder can be the director of the company. However, the sole director cannot be the company secretary of the company. Even if you are the sole shareholder and director, the company is considered as a separate legal entity from you once incorporated.

What happens if the sole director and shareholder dies?

Another core feature of your company being a separate legal entity is perpetuity. Even if the sole director and shareholder of a company unexpectedly died, the company will not come to an end as a result. The successor(s) will have to obtain a grant of representation from the court, which will enable them to take the shares and appoint a new director.  However, this can lead to significant delay in appointment of new director and effective management until then, therefore, the nomination of reserve director by the sole director becomes essential.

Nominate Reserve Director

If a private company has only one shareholder and that shareholder is also the sole director of the company then a reserve director can be nominated. The reserve director will act in place of the sole director in the event of the sole director’s death.

This is not a mandatory requirement. However, if a reserve director is nominated then ​​, such nomination should be reported to the Companies Registry within 15 days from the date of nomination using the  Form ND5 (Notice of Change of Reserve Director (Nomination/Cessation)

Separate legal entity

The doctrine of separate legal personality is the core feature of a limited company. It applies irrespective of the number of shareholders or directors of a company. Therefore, a private limited company is a separate legal person with its own capacity to hold rights and liabilities and the sole shareholder will not be personally liable for business liabilities.

Exceptions to the separate legal entity doctrine

There are, however, exceptions to the rule of separate legal entity. In essence, these exceptions are in place to prevent the abuse of a separate legal entity by the controllers. Statutorily, the Companies Ordinance (Cap. 622) and the Transfer of Businesses (Protection of Creditors) Ordinance (Cap. 49) provides for instances where the officers and/or controllers would be liable for the company.

Note that if you, as a controller, make use of your company to evade or frustrate an existing personal legal obligation deliberately, the courts can employ the doctrine of piercing the corporate veil against you.

For instance, if you were indebted, being aware of that, you set up a company and transferred all your assets to the company and declared bankruptcy. As a result, your creditors could make no effective claim against you personally. In such circumstances, the court would consider your company a sham. The reasons are that you were aware of your debts when you set up the company, and you likely incorporated the company to hide behind its separate legal personality. This illustration demonstrates the legitimate limitation to an abuse of a separate legal entity.

Key takeaway

• A sole shareholder can be the director of a private limited company.
• The sole director can nominate a reserve director who will act in place of the sole director in the event of the sole director’s death.
• A sole director or shareholder does not affect the separate legal personality of the company. Once incorporated, a company is considered a separate legal entity.

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