Short Answer
In the vast majority of cases where appropriate planning has not taken place the company becomes "paralysed" sometimes for many months and possibly for some years.
The Problem
The company is governed by its Directors. Directors are appointed by existing Directors or they can be appointed by the shareholders. If there is only one person who is the Sole Director and the sole shareholder of the company and that person dies then unless there are "self-effecting" provisions to the contrary (which do not exist in the vast majority of cases) the company can do nothing until another Director is appointed. If the deceased person left a Will (which was reasonably up to date) and which appoints an Executor, the Executor is still unable to act (on behalf of the Estate of the deceased shareholder) to appoint another Director unt the Executor has obtained a Grant of Probate. We know that approximately 50% of the population have no Will or no up to date Will. In cases where a person dies without a Will ("intestate") then there will need to be a Grant of Letters of Administration taken out generally by a close relative. That person becomes the Administrator. After an Executor obtains a Grant of Probate or an Administrator obtains a Grant of Administration that person would be able on the behalf of the deceased shareholder to appoint a person as Director. That process (of taking out a Grant of Probate or Administration) can take many months. Of course if there is a Will and it is "challenged" then the process of obtaining a Grant of Probate can take some years.
What can the company do in the meantime?
The answer is that the company can do nothing until it has another Director. Of course that can have fairly economic disastrous consequences if the company was carrying on a business or if it was in the process of a transaction at the time of death. The company may not be able to pay wages or its creditors or to conclude a transaction or contract. Its reputation and value may be ruined. Of course the company may have been the trusteee of a Superannuation Fund or the trustee of a Discretionary Trust. In the case of a Discretionary Trust there is sometimes the power residing in the Trust Deed for someone to appoint a different trustee but that of course can also be a difficult process because it involves changing the name of the trustee on all of its assets before it can really act again. In the case of the Superannuation Fund the Trust Deed may but rarely ever does, make provision for a person or persons to have the power to appoint a new trustee in the meantime but in most cases the Superannuation Fund would simply be unable to act and to deal with its assets in any way.
What companies are likely to be affected?
So far we mentioned only the company which has one person as the Sole Director and shareholder but of course it may be that the company is a typical "mum and dad" company. In this case where only one of the spouses dies the other one is likely to be able to continue but of course the company then becomes a Sole Director, sole shareholder company with the same relevant risks; and of course if both "mum and dad" are killed in one accident then we have the same problem.
As mentioned above the company may be a company carrying on a business, it may be a company acting as the trustee of a Superannuation Fund, it may be the trustee of the Discretionary Trust, or it may be a company which has investment property or assets. The problem is widespread and real. So far we have referred only to what happens on death but of course the same problem can occur if the Director loses mental capacity, for example having had a stroke or an onset of Alzheimer's disease or as a result of head injuries, or for that matter serious physical injuriy rendering the person incapapable of conducting his or her business affairs.
What can be done?
The answer lies in careful and exact planning. In the case of a "stand alone" company it involves a combination of ensuring that there is an apppropriate Constitution, appropriate shareholding for the company, and that the person has an up to date Will and enduring Power of Attorney (a combination of documents which have a combination of "self-effecting" provisions). What is important is to ensure that it is not necessary for a Grant of Probate or Administration to be taken out after a person dies before someone can act; or the Guardianship and Administration Tribunal to appoint someone as an Administrator for a disabled person before action can be taken.
It needs to be remembered that an Enduring Power of Attorney lasts only for the lifetime of the person who gives it and "dies" with its donor and (on the other hand) a Will is only activated by the death of the Testator. All of this emphasises the need for a "suite" of documents which allow "self-effecting" mechanisms to occur.
Different lawyers do offer different potential solutions but some of those that we have heard of have not been tested for their efficacy ("ability to do the job"). At Anderssen Lawyers we are constantly looking at issues concerning Estate Planning and problems which need to be dealt with and finding solutions to those problems. It is not appropriate for this publication to endeavour to set out the detail of how it is achieved. That is partly because the method depends on the need. A company which is controlled by an older person who has adult children holding responsible pisitions in life could be provided with an entirely different solution to that which would be provided for a person a generation younger. The trustee company of a Superannuation Fund may be provided with yet a different solution and a company which is the trustee of a Discretionary Trust may have yet another solution.
Superannuation Fund
The extent of the problem mentioned above can be very serious in the case of Superannuation Fund Trustee Companies which are required by law to pay out the deceased member's fund within a limited space of time and where that is not complied with there can be serious taxation consequences. There often seems to be a false assumption that relevant legislation allows an Executor to "step in to the shoes" of the deceased superannuant; but this is not the case. Specific provisions need to be made to allow or give power for a change of Trustee or appointment of new Director.
Furthermore provisions of documents which provide for the decision about who is to control a Superannuation Fund on the death of the superannuants may also give the power to make discretionary decisions about who will receive the proceeds of the Superannuation Fund itself. In these cases the decision is extremely important as to the identity of the persons who should succeed to the control of the fund through the control of the superannuation Trustee Company.
It needs to be remembered that assets in superannuation do not necessarily form part of a deceased person's Estate - although documents can be signed which ensure that the Superannuation Fund is paid to the Estate.
Discretionary Trusts
In the case of Discretionary Trusts what needs to be strongly emphasised is that (as with Superannuation Funds) the assets of the Trust do not necessarily form part of the Estate of the deceased person. Therefore the person who will control the trustee of a Discretionary Trust is an extremely important matter because that person or those persons may well be the persons who have the ability to decide who will share in a distribution of the capital of the trust when it is "vested" ("wound up"). Of course as set out above the Trust Deed itself in the case of Discretionary Trusts as in the case of Superannuation Funds is an extremely important document as part of the suite of provisions which design the succession of control.
It is probably true that the vast majority of Self Managed Superannuation Funds and Discretionary Trusts have no appropriate succession plan in place at all, it is mostly left to chance and often involves most of the assets which the deceased person or persons would have regarded as "theirs" but which (on the contrary) do not necessarily form part of their Estate.
All of this underlines the need for the company which is a Trustee to have self-effecting provisions for passing on a method of control - or at the very least, provisions for how successor Directors can be appointed immediately when the person or persons die (who are the only Directors and shareholders of the company).
Concluding Comment
At Anderssen Lawyers we have spent a great deal of time and effort studyng the problems which exist in these cases and working out appropriate solutions.
Does your current solution have the ability to "do the job"?
