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What happens if a company’s sole director/shareholder dies?

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17 May 2018

SME business people such as finance brokers usually relish the freedom from legal formality afforded by the sole director/shareholder company model. This innovation was introduced by amendments to the former Corporations Law in the mid-1990s.

Since that time a company can validly exist without having to have at least two “officers” (directors or a director and secretary) to sign legal documents, providing it was set up specifically to comprise only one director. Quite often such a sole-director company will have only one shareholder.

But what happens if the sole director/shareholder suddenly dies? How can the company keep functioning? There is still a business in existence, but no-one around to run it.

The company’s suppliers and customers may expect to see the deceased director’s signature on its purchase orders or terms of trade, and be unsettled if the signature is absent. Also, what happens if the deceased was the sole signatory to bank accounts – how do other business parties and for that matter any employees, get paid?

Fortunately, the Corporations Act 2001 (belatedly) comes to the rescue, at least part of the way. Under section 201F(2), if a company’s sole director and shareholder dies, the deceased’s “personal representative” may appoint some other person as a director of the company to carry on its business.

That personal representative is either the executor/trustee of the deceased’s will, or, if there is no will, the person to whom the court grants “Letters of Administration”. This is the legal system’s way of dealing with intestacy (i.e. a person leaving no will).

However, obtaining Letters of Administration can take between 6 – 8 weeks, from the time an application is lodged with the court. Obviously that doesn’t allow for the time needed to prepare the accompanying affidavit. And that requires pulling together supporting paperwork such as marriage and birth certificates.

If the deceased had made a will, the executors can appoint an interim director to keep the business running while waiting for probate to be granted to the will’s beneficiaries. After that, the beneficiaries may then take full control of the company.

In the period between sudden decease of the sole director and the company getting up and running again, cash flow can be paralysed, customers lost and the business’s reputation diminished. The relative freedom and convenience of the sole director/shareholder model can see value quickly eroded if business succession plans are not put in place in advance.

Having an up-to-date will (together with the standard form enduring powers of attorney and guardianship) is recommended. But possibly of equal importance is for the business owner to have someone in mind who can step in quickly to keep things running, without needing the approval of the court.

In those circumstances, a limited power of attorney from the sole director to a spouse or trusted associate, enlivened in the event of death, might be one way of ensuring orders are filled and bills paid, at least in the short term.