Legal Tip 410: Death of a sole shareholder and director of a company

Shareholders generally control who the director of a company is by their voting power. It is then the director of the company that runs the company.


So what happens if the director is the only shareholder and he or she dies? Shares are property which can pass via the deceased’s will or, if there is no will, then by the laws of intestacy. Title for the shares will pass to the executor/Administrator (the Legal Personal Representative or LPR) of the trust and then to the beneficiaries under the will/intestacy rules. Once they pass the new shareholders can appoint a new director.


But the problem that arises is the company will have no director and no shareholders until the executor/administrator is legally given their powers by the Supreme Court. This can be a disaster for a trading company because no one will have the power to operate bank accounts, to pay bills and to generally run the company. It will take at least 1 month but more likely 6 months for this to occur.


Section 201F of the Corporations Act allows the LPR to appoint someone as director or to appoint themselves as director. http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s201f.html


Notice the vague wording of this section:

“...personal representative or trustee is appointed to administer the person's estate or property…”


This doesn’t seem to relate solely to the LPR appointed by a court, but could, possibly, be the person named in the will of the deceased - with the deceased making the appointment.


Where a sole director is suffering a terminal illness an additional director could be appointed so that the surviving director can run the company until the new shareholders are appointed and they can then appoint the new director.


It may also be possible to appoint a successor director while still alive if the company constitution allows it. The successor can then act once the existing director is legally incapacitated – such as being dead.


I recall a recent case in the NSW Supreme Court where the sole director and sole shareholder of a real estate company died. The deceased was operating a trust account which contained deposits for approximately 29 property transactions due to settle within about a month of the death. There was an urgent application to the court to appoint a trustee to take control of the trust accounts so that deposits could be released in time of settlement. The dead director was the only one who could have released the deposits until this happened.


This sort of thing is costly and something you don’t want to be considering just after a loved one has just carked it.

 

And very large estates may have multiple complex issues involving trustees and operating entities so probate is awefully slow. A urgent application may be a costly problem. Alternate Directors is a strategy to seek legal advice on prior to death. Death may be a trigger. It also comes with some risks and the powers of the alternate should likely be given with limits.

There are now trusts and company constitutions which embed testatmentary like powers that are triggered at defined events like lacking capacity, death, strokes and medical impairment etc. that are embedded. Even a cascading sequence.. One optional power is also power of veto. Another is a bloodline limit. This can work alongside a successor. So the power of veto is held by a independent person familiar with the issues and the deceased.And JOINT appointment may also be a consideration so two minds ensure acts and choices have some supervision. eg .It acts like a will without it. I dont refer to the provider as such issues should be given legal advice.