If you are a director in a private company, having a well thought out estate plan is crucial.
Being a director
Private companies are commonly used to:
- manage a business
- invest in assets
- trustee of a family or unit trust
The company may have a sole director, or in typical mum / dad arrangements may include both as directors.
Directors are generally responsible for management of the company and may exercise all its powers. Without a director, a company is in breach of the Corporations Act 2001 (Cth) and it may cause significant determinant to the value of assets if unable to function properly.
Can I pass on the director role?
Under most constitutions, the director role is usually automatically vacated on incapacity, bankruptcy or death. Inevitably, this will mean there will be some situations where a company has no director – so planning is key.
The director role is a personal responsibility – not a propriety right. The role cannot be passed or handed down to someone else, which is a common misconception. Rather, it is an office to which a person is appointed, so a director must be appointed in accordance with the company's constitution.
To appoint a new director, most standard constitutions require:
- The directors to appoint a new director; or
- An ordinary resolution, being a vote of more than 50% of shareholders
Death of sole director / shareholder
For a sole director / shareholder company the process is more straightforward, however careful planning is still required.
In this scenario, the Will can be used to gift shares to the person who is to control the company. The new shareholder then votes on the shares to appoint themselves as director.
This is similar where there is a loss of capacity of a sole director / shareholder. The Power of Attorney of a shareholder can vote on the shares to appoint a new director.
Section 201F of the Corporations Act 2001 (Cth) permits the personal representative of a director (being the executor if the director has died, or Power of Attorney if loss of capacity) to appoint a director (this power can be used in the event the shares have not been gifted or the executor holds the shares to ensure that a company does not end up in a position where there is no director).
Having a Will is crucial as it clearly confirms the personal representative of an estate (and avoids the time delay that can arise when seeking a grant of letters of administration to confirm the personal representative). Careful consideration is required as to who receives the shares under a Will, who is the executor and who is the Power of attorney for a shareholder.
Death in company where more than one director / shareholder
The process may get a little more complicated in a company where there is more than one director / shareholder.
In typical mum / dad arrangements, each will leave their shares to the other and they ultimately control the company so there is usually no issue. However, in other scenarios, it will largely depend on whether there is a majority shareholder and the dynamic between the parties.
For example, on death or incapacity of a shareholder (holding 50% or less of the shares), the shareholder or executor or Power of Attorney will not have sufficient voting power to appoint a director. As above, most common constitutions require a director (i.e. existing director) or an ordinary resolution (being more than 50% of the vote) to appoint a new director. In this scenario, unless the other director or shareholder agrees to the appointment, representation at the director level may be lost.
There are other factors which may also impact such as a shareholder agreement between the parties or changes made to the constitution.
As this is a complex area, we strongly recommend seeking advice from an experienced lawyer to talk through options for planning for loss of capacity or death of a director as it can change dramatically depending on the circumstances.
Corporate Power of Attorney
A Corporate Power of Attorney can be used to ensure that a company continues to operate smoothly in the absence of a director. It appoints someone you trust to act in the best interest of company and its shareholders with appropriate financial knowledge and skill, and we recommend this is given careful consideration in any estate plan.
As an alternative, appointing an alternate director means that if a director is unavailable or incapacitated there is someone legally authorised to act for the company as director.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
