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.”
The issues for a trustee company are similar and even more dangerous for an SMSF trustee company
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.
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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
- There is exposure and liability for accountants and advisors with sole director companies – trading, trustee, or otherwise
- The best, simplest and quickest solution is to put in place specific documentation for single director companies and for those companies where family interests are represented in an appointed director.
What is the Solution
In short, a company constitution may provide for a person 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.
The usual solution is for an Alternate Director but this will not work as it ceases on death.
Your Company needs either on set up or after an upgrade of the constitution and a pre-signed resolution appointing a new 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 an SMSF or trust.
At Metropole Wealth Advisory we can provide a Structure Survival Review to review this and other critical elements in the setup and operation of your company and or trust.
This is particularly critical in single director SMSF trustee companies where penalties for inappropriate behaviour can be applied by various government bodies and potential beneficiaries.
The risks in an operating company can be both severe and long-lasting.