Are you the sole director and/or sole shareholder of a company?
As a sole director, have you thought about what would happen to your company if you become incapacitated, or worse, if you die? Who would pay the bills, and enforce the company’s rights?
A company can only act through its directors, and if the sole director is not able to act, then the company is effectively ‘frozen’. The only people who can appoint a new director are the company’s shareholders – and if you are also the only shareholder, then things get interesting…
If you become legally incapacitated
If you become incapacitated and have appointed your own personal enduring attorney, and you are the shareholder, then your enduring attorney will be able to appoint a replacement director, (provided you have given them wide enough powers and are still alive). Your enduring attorney can appoint a replacement director by passing a written resolution as the sole shareholder. Thankfully this written resolution can be made without the director (i.e. you) first calling a meeting of members.
We note that your own personal enduring attorney is not able to simply step into your shoes as the director of the company, they can only exercise your powers as a shareholder. This is because your role as a director of a company is not something you can ‘delegate’ to a personal enduring attorney.
If you have not appointed your own personal enduring attorney, then the affairs of the company will remain frozen until an application can be made to your State’s Civil and Administrative Tribunal to have a person appointed to administer your affairs. This can take months… So the key takeaway here is that you should ensure that you have made a personal enduring power of attorney. Read more about how to put in place an enduring power of attorney here.
What if you have died?
As noted above, the only person who can appoint a new director are the company’s shareholders. But in this case, the only shareholder has died (i.e. you). In this situation, the company remains frozen until the person you have appointed as your executor under your Will is able to step into your shoes and deal with your shares in accordance with your Will.
Whether the person(s) you have nominated in your Will as your executor can immediately step in and exercise your rights as a shareholder will depend on a number of factors, not the least of which is the State in which you have died. In some states your nominated executor has this authority immediately, in others a ‘grant of probate’ is required. Things can also get complicated if there is more than one executor who cannot agree on a course of action, or if the validity of your Will is subject to a challenge.
The time period between when you die and when your executor is granted authority to deal with your assets (i.e. probate is granted) generally lasts several months. Even if your executor is very efficient and gets the application into the Probate Registry within weeks (which rarely happens), the processing time after that is usually months.
We also note that your Will must contain provisions enabling your executor to exercise your authority as a shareholder to appoint a director immediately, rather than requiring a distribution of your shares to your beneficiaries. This is because it may take some considerable time before your executor is able to make a distribution of the shares from your estate to your intended beneficiaries.
So who pays the bills in the interim, i.e. between your death and probate of your Will?
One strategy to deal with this issue is for your company to appoint its own attorney. Under the Corporations Act, a company has all the powers and authority of a ‘natural person’. Accordingly, your company can appoint an attorney to act on its behalf when the company itself is not able to act. Unlike humans, a company does not die. So when you have passed away, the person the company has appointed as the company’s attorney can continue to act on behalf of the company itself.
We generally recommend that you appoint the same person (or persons) that you have appointed as the executor under your Will to be the company’s attorney. The executor can then step into your shoes straight away, rather than having to wait until the authority of your executor is properly established.
This is a simple strategy that can save a lot of grief.
What if you are the (sole) Australian resident director of a foreign-owned company?
Another circumstance where you may wish to consider using a company power of attorney is when the company is foreign-owned and only has one resident director.
The company is likely to have one or more foreign directors, which means that at least two directors must sign contracts for the company. However, having the foreign director sign contracts can sometimes be logistically difficult. For this reason, the company may wish to execute a company power of attorney to delegate sole authority to the local resident director. If necessary, the power of attorney can also be drafted to limit the extent of the authority of the local director, so that more important actions still require the involvement of at least one of the foreign directors.
To put Company Powers of Attorney in place for your sole director / shareholder companies, call us on 1300 654 590.
Click here to find out more about how we can help you with your Business Succession Plan.
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The information contained in this post was reviewed on 13 July 2022
