ASIC has released a warning - Info73, that in the event of the death, incapacity, or bankruptcy of a sole director company that:
“During that period when there is no director, the company may be completely unable to operate. With no one properly authorised to make management decisions or act for the company, it may be unable to trade. Banks and other financial institutions, in particular, may be unwilling to accept instructions in relation to a company’s trading account if they are not satisfied there is someone properly authorised to act for it. Equally, staff and suppliers may not be able to be paid, which can quickly have a deleterious effect on the reputation and value of the company to the beneficiaries of the estate.
If, on the other hand, a person is willing to purchase the company, they may not be able to do so quickly because there will be no recognised owner of the shares who can authorise their transfer until the testator has been appointed and settled the estate. Even if the final decision is taken to wind up the company so all beneficiaries can be paid out, the delay of possibly several months may mean the value of the company will be much less than it might otherwise have been if it had been able to continue operating in the interim period.”
There are almost 3 million companies in Australia, and many are used by small business owners to trade and for others, there are trustee companies for discretionary family trust and SMSFs. So what happens when the director of the company – trading or trustee dies or becomes incapacitated?
Will the business fail?
Will it go into long slow hibernation until Supreme Court legal action is taken to install a director or new trustee?
Will the company be taken advantage of by existing directors?
Will lawyers seeking to make claims against the estate lock up the company or put their favourite director in?
For SMSFs will the ATO install their own directors?
Will action be taken against an accountant for failing to advise the client post Info73
Any of the above reasons can spell disaster for a company, trust, or SMSF. We have seen cases where a company was run into the ground in a short space of time because there was no director and the accountants and lawyers to the company did not realise that the director’s Will is ineffective to appoint a continuing director.
The two takeaways for accountants are:
There is exposure and liability for accountants with sole director companies – trading, trustee, or otherwise
The best, simplest and quickest solution is to put in place a Successor Director for single director companies and for those companies where family interests are represented in an appointed director.
What is the Successor Director solution?
In short, a company constitution may provide for a person known as the Successor Director to take over from a sole director or a director on a Board when the current director is sick, dies, or is subject to litigation including divorce or bankruptcy. An Alternate Director will not work as it ceases on death. Post upgrade of the constitution and a pre-signed resolution appointing a Successor Director in the event of incapacity, death, or bankruptcy, the company will continue operating and conducting its business. This includes the business of acting as a trustee of a SMSF or trust.
Successor Director Case Study
John Smith runs his trading company as a sole director. He has ten staff and is very hands-on but his staff does know what to do to keep the business running. He is also the sole director of the trustee company for his family trust and self-managed super fund. John dies in an accident and leaves behind a business, a wife, and two young children.
John’s family wealth is exposed, as are all of his structures. Who will pay the bills? Will his family be able to access any money – even for the funeral? And this is only the tip of the iceberg – what happens if the bank mortgage payments can’t be made. The stress and worry for the grieving family is the last thing they need.
But John’s accountant has put in place the Successor Director solution for all his companies and on John’s death, his brother Robert is appointed as Successor Director the next day to keep an orderly transition of the business, the family trust, and the SMSF. Funeral expenses are paid for and ongoing income is paid to the family.
Putting the Successor Director Solution in place
To put in place the Successor Director solution you need to first upgrade the company constitution to enable the Successor Director. Most standard companies do not have a Successor Director option. Once the constitution is updated then you provide a binding resolution, signed by the current director or directors which will auto-install the Successor Director in the event of death, disability, bankruptcy, litigation, or for any other reason. There is no need to inform ASIC at this time as the Successor Director is not being appointed now but in the future, possibly.
LightYear Docs has built a Successor Director solution for a single company which includes the company constitution upgrade and resolutions for only $145 with the process and documents provided by Abbott & Mourly Lawyers. You can find the Successor Director Solution in the document wizard under Company Variation, Upgrades and Admin in Standard Companies.
We also have an automation solution where you can do two or more companies in a single interview which would be great for John Smith as he has three companies to do. If you would like to access the multi-document solution then contact support.
Currently, there are hundreds of accounting firms offering the Successor Director solution to their clients. The email out the details of the Successor Director and why it is necessary, which we have pre-written for you and can be found here:
The fee charged by most firms is between $350 - $450 which is great value for a company constitution upgrade plus relevant minutes and a solution that takes a huge weight off the client’s shoulders.
So don’t get caught short-handed with sole director companies – put in play the Successor Director solution now.
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