It is often that our clients seek advice about the future of their personal assets and what will happen to them in the event of an emergency such as incapacity, but what often gets overlooked is making a contingency plan for their Company if they need someone else to step in as a Director.
Their Company could be a family business, part of a larger corporate structure, or the trustee of their trust.
This article will briefly address the different parameters that a Director may need to consider when creating a contingency plan for their legal and financial matters.
Does my Enduring Power of Attorney extend to my Company?
An Enduring Power of Attorney is a legal document where a person (known as the Principal) appoints substitute decision makers (known as their Attorneys) who can make decisions for them.
It is a common misconception that by making an Enduring Power of Attorney for an individual who is also a Director of a Company, that their Enduring Power of Attorney will also extend to the role of Director in Company – but case law has proven otherwise.
When a person makes an Enduring Power of Attorney, it is made in their own personal capacity and relates to their own financial, legal and personal affairs. It does not extend to a Company as a Company is considered its own legal entity capable of possessing its own financial and legal matters[1].
What happens to my Company’s operations if I became incapacitated?
- Sole Director and Shareholder:
If you are the sole Director and shareholder of your Company and you were to become incapacitated due to injury, illness or you lost your mental capacity, then your Company may be left in “limbo”. The Corporations Act confirms you would automatically become disqualified as a Director of the Company.
If you had a personal Enduring Power of Attorney for financial and legal matters, your appointed Attorney could call a meeting and form a shareholder’s quorum (majority vote) to appoint a new Director (however, this process takes time).
If you did not have a personal Enduring Power of Attorney, then your Company will no longer be able to operate until a new Director has been appointed by way of an application made to the Victorian Civil and Administrative Tribunal (for an Administrator of your affairs) or the Supreme Court for the appointment of a Trustee (which will also take a significant amount of time).
In both circumstances your Company faces high risk issues relating to its inability to continue its operations whilst waiting for an alternative Director to be appointed.
There may be creditors or debtors requiring payment, trades to be made, tax returns to be filed, company contracts to be entered or ended.
- More than one Director and Shareholder:
If you are the Director of a Company and you were to become incapacitated due to injury, illness or you lost your mental capacity, and your Company has more than one Director, then your co-Director(s) would automatically assume control of your Company in your place.
Whilst this may not seem like an issue, it is wise to consider if it is your intention for your co-Directors to obtain full control of the Company without a person representing your interests being appointed.
You’re probably wondering what can be done to circumvent these potential issues faced by the incapacity of a Director and it may be an answer you may not have heard of – a Company Power of Attorney.
What is a Company Power of Attorney and why is it effective?
As a Company is its own legal entity (‘a legal person’ under the law) capable of possessing its own financial and legal matters, it can also make a Power of Attorney to appoint a substitute decision maker if a Director becomes unable to continue acting due to incapacity.
A Company Power of Attorney is beneficial in the event of a Director losing capacity as it provides an Attorney with the ability to continue business operations including:
- Ensuring the Company is adhering to its compliance requirements;
- Attending to any tax matters; or
- Making decisions about day-to-day business operations that may be time sensitive.
A Company Power of Attorney is made in a similar manner to an Enduring Power of Attorney however, it may also require a meeting to be held by any co-Directors so that it can be adopted by a resolution at a meeting.
By planning ahead and making a Company Power of Attorney, you are ensuring that your Company will not have to cease its operations unnecessarily due to you loosing capacity.
What happens to my Company’s operations if I were to pass away?
It is important not to get the concept of incapacity of a Director confused with the death of a Director.
- Sole Director and Shareholder:
Under the Corporations Act 2001 (Cth), if a sole Director and a sole Shareholder passes away, the Executor of their Will ordinarily steps into the role and may appoint a new Director.
For this reason it is important to ensure that:
- Your Will is up-to-date; and
- The person you have named as your Executor in your Will would not only be fit to prove your Will and administer your Estate, but also the best fit to manage your Company as a Director.
If you are the Director of a Company and you were to pass away and your Company has more than one Director, then your co-Director(s) would automatically assume control of your Company in your place.
Whilst this may not seem like an issue, it is wise to consider if it is your intention for your co-Directors to obtain full control of the Company as part of your succession planning.
How can KPA Lawyers help you?
KPA Lawyers specialise in estate planning from simple affairs to high-net worth individuals. We take a holistic approach and review your assets and personal interests in trusts, companies, structures, superannuation, contracts and agreements to ensure that all aspects of your estate planning are addressed and that you can make an informed decision to ensure your Will and Estate Planning documents meet with your objectives.
The above advice is general in nature, and your individual circumstances will depend upon your individual circumstances and your Company’s constitution, which are best to be reviewed by a professional.
If this article has raised any queries for you about your role in your Company, please reach out to speak to our friendly and dedicated Wills, Trusts and Estate Planning team and they will be pleased to assist you.
[1] S. 124 Corporations Act 2001 (Cth).
The KPA Lawyers Media articles aim to keep our readers informed with regular updates regarding legal developments. It is not to be taken as legal advice. Liability limited by a scheme approved under Professional Standards Legislation.
