Business owners are used to planning for the unexpected. Recent disruptions such as natural disasters, economic downturn and the COVID-19 pandemic have shown that businesses must be prepared to adjust and be flexible to weather any storm.
While many business owners are prepared to do what it takes to get through an unexpected event, they often don’t take themselves out of the equation. That is to say, what happens if the unexpected event is the business owner becoming incapacitated, and they are not able to operate and make decisions for the business?
Early on, it may be possible for staff to keep the front door open and make do with the information they have access to. However, as time goes on, critical decisions and business functions that the business owner is usually responsible for such as payroll, or key operational decisions, may become more and more pressing.
For this reason, business owners need to ensure that they have their house in order to ensure the business can continue operating during their period of incapacity.
We recommend that business owners consider the following:
1. Enduring powers of attorney
This document is critical for all adults, whether they are business owners or not. However, when a business owner is involved, having an Enduring Power of Attorney in place can be the difference between keeping a business operating and operations being locked down indefinitely.
An Enduring Power of Attorney allows an individual to appoint an attorney to make legal and financial decisions on their behalf in the event of their incapacity.
Sole traders should strongly consider putting in place an Enduring Power of Attorney if they do not already have one, due to the nature of sole trader business operations.
Keep in mind that a company can only act through its directors. Critically, where an individual is the sole director and shareholder of a company, their enduring attorney can exercise shareholder powers to appoint a new director to the company by passing a written resolution. This ensures that a company can continue to operate in the event of the sole director/shareholder’s incapacity.
Even if there is another director appointed to the company, you may like to consider giving your enduring attorney instructions about exercising shareholder powers to appoint a director in your place, to ensure your interests continue to be represented on the board.
Powers of attorney are regulated based on State or Territory legislation. If an individual operates a business in multiple jurisdictions, then making a power of attorney in each jurisdiction should be considered.
In the case of an incapacitated sole director/shareholder, if you have not appointed your own personal enduring attorney, then the affairs of the company will be frozen until an application can be made to your State/Territory’s Civil and Administrative Tribunal to have a person appointed to administer your affairs. This can take weeks or months. This complication can be surpassed if you ensure that you have made an Enduring Power of Attorney.
2. Company powers of attorney
For individuals that operate through a company, a company power of attorney may also be used to ensure a company continues to operate in the event of the sole director’s incapacity.
Companies have the same power and authority as a natural person under the Corporations Act 2001 (Cth). Utilising a company power of attorney may be more appealing where directors wish to exclude the right to exercise shareholder rights for their personal enduring attorney, or if they wish to appoint different people as attorney themselves personally vs. for the company.
The benefit of a company power of attorney is that it can continue to operate in the event a sole director dies after being incapacitated. This allows payments and other decisions on behalf of the company to continue to be made even while a director’s estate is being administered.
3. Controlling trusts in the event of incapacity
Trusts are often used in businesses, and it is critical that appropriate documents are in place to ensure their ongoing control.
Under the usual terms of trust deeds, if an individual appointor (being the party authorised to change the trustee) dies or loses capacity, their legal personal representative can exercise their power to change the appointor of a family trust. Practically, this means they have ultimate control over the trust assets.
If the trust deed allows it, then it is possible to include an authorisation in a personal Enduring Power of Attorney to act in relation to any trusts controlled by an incapacitated person. This approach is simple and will not prevent successor appointors operating the trust for their own benefit, to the exclusion of intended beneficiaries or against the interests of the business.
More complex strategies include utilising a suite of deeds entered into during the trust controller’s lifetime. These can include Deeds of Appointment on Event, Deeds of Variation and Control Deeds. These deeds operate to provide more comprehensive appointment provisions for successor controllers of trusts (such as multiple or cascading appointments, and appointments conditional on an event) and bind future controllers of the trust to operate the trust in a particular way.
Where trusts are involved in a business structure, it is best to seek professional legal advice about the most suitable way to secure future control of the trusts in the event of a business owner’s incapacity.
