Contact Us

    Succession Planning and Company Constitutions

    Jul 31, 2019 11:53:10 AM

    There is much more to succession planning than simply putting in place a generic Will, and a Power of Attorney and Guardianship appointment document.

    Here is a case study to show the importance of company constituions.

    Peter and Mary were the directors and shareholders of a company selling sophisticated power boats. As husband and wife they were also the directors of a company, which is the Trustee of their Self Managed Super Fund (“SMSF”). Sadly, Mary lost capacity for 7 months and then passed away.

    Peter was the second husband of Mary. Each had children from their respective first marriages.

    Should Mary’s children be concerned? Definitely!

    Why should Mary’s children be concerned?

    The terms of most constitutions of companies provide that a director loses their office when they die or lose their mental capacity to make decisions.

    Peter therefore is in control the affairs of the company and can make decisions to the financial detriment of Mary’s children.

    Contrary to what most people think, Mary’s attorney (that is an attorney appointed by the terms of her enduring power of attorney) cannot make decisions for Mary unless the terms of the company constitution permits.

    Ordinarily, if a director of a company dies or becomes incapacitated, the surviving directors can continue to manage the company and may if the constitution permits make an appointment of a replacement director. Similarly, when a shareholder dies, the directors can continue to manage the company until the shares are transferred to the beneficiaries of the deceased shareholders.

    What if Mary was a sole director and shareholder when she died or became incapacitated?

    In circumstances where the director who is incapacitated or dies is a sole director and shareholder, the situation has a greater risk and uncertainty.

    So what can Mary do in advance?

    Section 201F of the Corporations Act 2001 provides that a personal representative or trustee appointed to administer Mary’s estate or property, appointed by Mary’s Power of Attorney or Will may appoint a person as the director of the company.

    This emphasises the importance of ensuring the terms of the Power of Attorney and Will are carefully drafted to deal with these circumstances.

    In this example both Mary and Peter were directors and shareholders. So what can Mary do in circumstances where she dies or loses capacity?

    The provisions of section 201F does not apply.

    It is therefore critical to ensure that the constitution of the company provides that a personal representative or trustee appointed by Mary’s Power of Attorney or Will may allow an appointment of a person to the position of director of the company instead of Mary.

    Mary also needs to make sure that the Power of Attorney and her Will both include appropriate clauses.

    Mary and Peter are also the directors and share holders of a company acting as Trustee of the SMSF, how does that impact the situation?

    Steps should be taken to ensure that Mary is replaced by someone of her choice as a director of the SMSF Trustee company.

    These steps include:

    • The Enduring Power of Attorney documentation or Probate documents being forwarded to the fund’s Trustee company;
    • The superannuation trust deed needs to be reviewed to ensure that the appointment as a trustee of the person holding the Enduring Power of Attorney or as Executor of Mary’s Estate occurs in accordance with the terms of the relevant clauses;
    • The process must follow the deed, SIS Act and SIS Regulations;
    • As the trustee is a company the fund will need to comply with the company’s constitution and Corporations Act with respect to the retirement and appointment of the director;
    • The trustee must lodge a change of details documents with ATO and/or ASIC to update its registrations and ensure regulatory compliance;
    • Permanent documentation to support the retirement and appointment will need to be maintained with the records of the fund and sighted by the fund’s auditor at the point of the annual audit;
    • Assets need to be held in the name of the trustees as trustee for the super fund.

    When people are alive with full mental capacity situations can be managed and assets can be protected. The problems arise when unexpected situations arise due to death or a loss of capacity. The unexpected situations can be foreseen, and plans can be put in place. Succession planning strategies are a good investment.

    If you have further questions about succession planning and company constitutions, please contact Andrew Frank at afrank@franklaw.com.au.

    This is not legal advice.

    Andrew Frank

    Written by Andrew Frank