If you are the sole shareholder and director of a private company, have you thought about what will happen to your business if you lose capacity or die? Failure to plan for this eventuality can affect the financial viability of your assets and leave your family vulnerable - so it is something you need to turn your mind to. Fortunately, there are several solutions that are easy to implement and lots of advice about these issues is available.
Requirement of a private company to have a director
A private company is one of the most popular business structures around – there are over 2 million of them in Australia. If you own and operate a business, you may be the sole director and shareholder of your trading or operating company, the company that acts as a trustee of your family trust and/or your self-managed superfund, as well as the odd ‘bucket company’ or two.
The Corporations Act 2001 (Cth) (the Act) requires a company to have at least one director who lives in Australia. A director is responsible for directing (and, in smaller companies, managing) the affairs of a company. Without a director, not only is a company in breach of the Act, but the business may not be able to operate properly. For these reasons alone, you need to have a plan in place if you are not able to act as a director of your company.
Depending on your company constitution, a director role is usually automatically vacated on a director’s incapacity or death. In these situations, you need to have someone ready and capable of taking control of the company immediately.
Planning for the death or incapacity of a sole director
The office of director is not one that can be ‘gifted’ or passed on to someone else. Most company constitutions require the other directors to appoint a new director or the passing of an ordinary resolution i.e., more than 50% of the shareholders. Therefore, if you are the sole shareholder and director of a company, here are a some estate planning strategies:
Make a Will. The office of director cannot be gifted. What can be handed down in your Will are your shares in the company to the person who is to control the company. The new shareholder will then be able to vote to appoint themselves as director.
If you do not have a Will and you are the sole shareholder and director of a company, the company will be unable to be managed for at least several months following your death while your family applies for and waits to be granted Letters of Administration before they can deal with your estate. Simply put, during this time there is no one who is legally able to conduct the business of the company and do all the things a director of the company does.
Even with a Will, probate is not a particularly speedy process and could leave you waiting for that formal authority to pass shares to the intended recipient. So what else can you do?
Appoint a legal personal representative. Section 201F of the Act allows the personal representative of a director to appoint a director.
During your lifetime, your personal representative is the person appointed as your power of attorney. If you lose capacity, the person with your enduring power or attorney can vote on your shares to appoint a new director. On your death your legal personal representative is your executor or in the absence of a Will, your estate administrator. When drafting Wills, we like to specifically grant the executor the power to appoint itself or a particular beneficiary as a director of a company to avoid disputes.
Having an enduring power of attorney and a Will clearly identifies who your personal representative is. This avoids disputes and delays and enables immediate compliance with the Act as well as continuity for a business.
Successor director provisions. Section 201K of the Act allows a director to appoint an Alternate Director to act for them in certain situations, for example, if the appointing director is overseas or unable to attend a directors’ meeting. However, the role of Alternate Director ceases when the appointing director’s office is vacated, for example, due to legal incapacity or death. This means that an Alternate Director offers limited flexibility for succession planning.
However, section 201K is a replaceable rule, which means it can be displaced or modified by the company’s constitution. For succession planning purposes you may wish to consider the addition of special provisions in your company’s constitution allowing for the appointment of successor directors that can continue to act if the appointing director loses capacity or dies. It might be easier however, to appoint a corporate power of attorney.
Appoint a corporate power of attorney. Just like a personal power of attorney, this is a legal document made by a company, in its capacity as a legal person, that appoints an individual (or company) to act and sign certain documents on its behalf. This means that if a sole director of a company loses capacity or dies, there is still someone capable of running the company until a new director can be appointed.
Have a complete asset protection strategy
It can cause real distress and hardship to your family if you are the sole shareholder a director of your company and there is no one authorised to direct or manage your business if you lose legal capacity or die. While things are being sorted out, the value of your assets may be detrimentally affected. Make sure you have a complete asset protection strategy and put in place the necessary documents to ensure continuity of your business at these times.
