By Kerstin Glomb and Anika Portelli
If any of your clients runs a business and acts as the sole director or one of the directors of a company, their estate plan should also address who should act as director in their place in the event of mental incapacity, physical incapacity or death.
It is important to know that your clients' enduring power of attorney or Will may not provide sufficient protection and the best outcome for them.
WHY? In case of mental incapacity, there is a common misconception that a person appointed under an enduring power of attorney can simply step into a person's shoes as the director of a company. Because an attorney is only authorised to make decisions concerning the appointing person's personal financial affairs, this is not the case. As the company is a separate legal entity, its financial decisions do not concern a person's personal affairs but only the financial affairs of the company.
An attorney may become or decide who becomes a director of your clients' company via their shareholding. However, this only works if:
- Your client is the majority shareholder of the company; or
- If your client is not the majority shareholder, the other shareholders consent to the appointment.
A further disadvantage is that your clients will not have any say as to who is appointed as a director in their place but rather the attorney makes this decision.
As you may know, an enduring power of attorney ceases to have effect upon the appointing person's death.
Generally, the executor of your clients' Will is authorised to administer the estate upon grant of probate. To obtain a grant of probate may take between two to six months from a person's date of death. During this time, no one is authorised to act as director of your clients' company. This may cause problems in particular for sole director companies or for companies which require at least two or more directors to act. Such insecurity for a company may exist even longer if your clients do not have a Will.
In this instance, a family member of your clients needs to apply for a grant of letters of administration. The requirements to support such an application may result in a costly and time consuming procedure.
In circumstances where time is of the essence, for example in business or property transactions, any delay in executing documents may have serious financial consequences for the company.
SO WHAT NOW? The solution to avoid the above difficulties is to appoint an alternate director or directors to act in your clients' place in the event that they are unable to do so by reason of either loss of mental and/or physical capacity or death.
An alternate director would be authorised to exercise all the powers of the appointing director as soon as any of the conditions connected with the appointment are satisfied.
The appointment of an alternate director allows your clients to choose a person whom they trust to continue the day to day business of their company in accordance with their wishes, as well as to determine the terms and conditions as to when the appointment becomes operative.
WHAT SHOULD YOU DO? Discuss the above difficulties with any of your clients who are directors of a company and the possibility to overcome these difficulties by appointing an alternate director.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.