What Happens to Your Company When You Die?
If you operate a company, several issues may arise when you die. What happens depends on how you company operates.
Multiple director and shareholder company
In many cases, it will be business as usual. Your shares in the company will be distributed in accordance with either a shareholders agreement, or buy sell agreement and in the absence of those documents, your Will. If you do not have a Will, the laws of intestacy will apply to your shares.
Your directorship will cease on death and whomever inherits your shares will be able to appoint a director.
Depending on the wording of the company’s constitution, there may be an issue with achieving quorums for meetings, especially if a specific number is mentioned i.e. at least 3 directors.
Sole director and sole shareholder company
This is where a number of complexities arise. The worst-case scenario is that you die without a Will. In this case, the company may find itself ‘frozen’. Until the shares are distributed to a new person who appoints a subsequent director, the company will be unable to operate.
This situation has been anticipated and section 201F of the Corporations Act provides that where the director of a sole director and sole shareholder company dies, the executor of the director can appoint a person to be director. If the director dies without a Will, then section is effectively useless as the estate must go through the laws of intestacy, which takes months, before someone can be appointed. Further if probate is needed, time delays may still occur if probate is delayed (which is not uncommon). To avoid this undesirable outcome, proper planning is needed. This can be achieved in several ways:
- The company could appoint a power of attorney to act on its behalf (a ‘company power of attorney’). Ideally this would be the same person who is appointed executor of your Will.
- It has been suggested by some lawyers that you personally can appoint a power of attorney and specifically authorise the attorney to act as director of your companies. For this to be achievable, the company constitution will need review and if needed, be amended, to specifically provide for this. Section 198D of the Corporations Act allows delegation of directors’ duties in the circumstances provided in that section. Once an attorney is appointed, the Company must hold a meeting noting the appointment and that it extends to the role of director.
This type of arrangement is ideal if you are still alive but lose legal capacity. However, it does not work on death because once you die, the power of attorney ceases (and instead the Will ‘takes over’).
- It has also been suggested that a further method to keep the company ‘unfrozen’ is to appoint an alternate director. However, a proper reding of the alternate director provisions under the Corporations Act suggest that when the director who appointed the alternate director dies, then the appointment of the alternate director ceases. To overcome this, a ‘successor director’ can be appointed. To achieve this, a clause inserted into the company’s constitution and specifically provides who will be successor director on the death of the current director.
Proper Planning is the Key
The above illustrates just how important proper planning is. Bosco Law can help you put in place a comprehensive estate plan that goes well beyond a Will. Please contact Peter Bosco on 0422 173 574 or peter@boscolaw.com.au.
This article is for educational and information purposes only. It is not intended to be legal advice. It has not been tailored to your circumstances. Bosco Law disclaims any loss suffered by you for relying on this article without obtaining tailored legal advice from a competent lawyer.