Watch out for out-of-control companies

B2B Editor1 September 2014

Watch out for out-of-control companies

Up until 1995 all companies had to have at least two directors. This posed significant issues for businesses looking to obtain the limited liability provided by company structures as quite often, for example, both parties to a marriage were, of necessity, directors of the company and if the company ever became insolvent both directors, and therefore any assets owned by the directors including the family home, could be exposed to a claim.

Since 1995, companies have been able to have a sole director, however, companies can only have a sole director if their constitution allows it. Many businesses have taken the necessary steps to amend their constitution to allow their trading or trustee company to have one director and have removed the non essential directors.

While the ability to have sole director companies helped solve an asset protection problem it introduced a business continuity and succession problem. If the sole director of a company, including a company acting as trustee of a trust or trustee of a self managed superannuation fund, loses capacity or dies, unless they have done certain things, the operation of the company grinds to a halt is no one will be in a position to continue to operate the company.

It is a commonly held misconception that a person’s Attorney, appointed under an Enduring Power of Attorney, can immediately step into their shoes as a director of a company if the principal loses capacity. This is not the case unless the rules of the company allow it. Generally, the shareholders would need to take the necessary steps to appoint a new director in place of the incapacitated sole director. It is therefore very important that the directors of all sole director and shareholder companies have an enduring power of attorney.

The situation can be even worse if a director dies as no one has the right to exercise the voting rights attached to the shares in a company owned by a deceased shareholder until probate is granted, which can take 3 to 6 months. The reason for this is that until probate is granted it is not clear who will have the right to deal with the deceased’s assets.

The problem exists even if, for example, a husband and wife both own 50% of the shares in the company and the wife, who is also the sole director, dies. Most company constitutions require 50% plus 1 vote to appoint a director. As a result, unless his wife has left her share to him and probate has been granted, the husband is unable to appoint himself as a director in place of his wife as no one is entitled to vote on behalf of the deceased and the husband only has 50% of the shares. This is a common business structure.

It is important to note, in the case of a trustee company, that the appointor of the trust, being the person having the power to change the trustee of the trust, cannot usually fix the problem. The reason being that the appointor can appoint a new trustee, however, no one will be able to sign any transfer documents to transfer the assets from the old company to the new company.

In the case of both incapacity and death, it is possible that someone else will be able to continue to operate the company bank accounts, however, no one will be in a position to enter into contracts or sign other documents on behalf of the company.

In order to overcome the problems that can arise in relation to sole director companies it is important to consider amending the constitution of the company to entrench someone as a director if the sole director loses capacity or dies. Alternatively, the company could appoint a corporate attorney to continue to act on behalf of the company after a sole director loses capacity or dies. There are also other solutions that can be tailored to fit particular circumstances.

Business control and succession should be considered on an ongoing basis and while a sole director structure is beneficial for asset protection purposes, all businesses operating under such a structure need to give consideration to the continuity of the business in the event that something happens to the sole director.

DDCS Lawyers can provide you with specialised advice in relation to all areas of business succession and estate planning. To make an appointment please contact a member of our estate planning team.

Brendan Cockerill is a Senior Associate of the firm.

18 Kendall Lane, New Acton, Canberra

phone (02) 6212 7600 [email protected], www.ddcslawyers.com.au