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Sole traders – what happens to your company if you’re not around?

Sole traders – what happens to your company if you’re not around?

If you are a sole director of a company, have you thought about what may happen to the company if you go on extended leave or if you die?

A company is a separate legal entity and can only act through its directors. The directors are the people who make decisions for the company and can bind the company.  If you are the sole director of the company and you are out of the country or not able to act (for example you are incapacitated), then the company effectively comes to a standstill as no decisions pertaining to the running of the company can be made by anyone else.

Who would pay the company’s tax invoices, enforce the rights of the company or enter into contracts for and on behalf of the company?

The only people who can appoint a new director are the company’s shareholders – and if you’re the only shareholder of the company, then issues arise.

What happens if you become incapacitated or absent from your role as sole director?

In order for the company to continue operating efficiently, it is advisable for your company to have in place a Corporate Power of Attorney. Under the Corporations Act 2001 a company has all the powers and authority of a natural person. Accordingly, your company can appoint an attorney to act on its behalf when the company itself is not able to act. Then the company can continue to function under the directorship of the appointed attorney.

If you have appointed your own personal enduring attorney (via a Power of Attorney), that person becomes a shareholder of your company should you be incapacitated or absent.

If you are the only shareholder of your company, then your attorney (now a shareholder) should be able to appoint a replacement director of the company, provided you have given them wide enough powers.

Your own personal attorney would not be able to step in your shoes as a director of the company themselves. They would only be able to exercise their power in appointing a director, in their role as a shareholder.

Your attorney would then appoint a replacement director by passing a written resolution as a shareholder of the company.  Your role as a director of a company is not something you can delegate to a personal attorney; you can only delegate your duties as a shareholder.

If you have not appointed your own personal enduring attorney, then the affairs of the company will be at a standstill until such time as an application can be made to the Guardianship Board to have a person appointed to administer your affairs.

What happens to your company if you die?

The only persons who can appoint a new director of a company are the company’s shareholders. If you are the sole director and sole shareholder and you die without having made a Corporate Power of Attorney, the affairs and conduct of the company will come to a standstill until the person you have appointed as your executor under your Will is able to step into your shoes and deal with your shares in accordance with your Will.

If you die without having made a Will then your death will usually leave the company without any person properly authorised to manage the company until such time as Letters of Administration are granted.  Application for Probate and Applications for Grant of Letters of Administration may take considerable time.

So who conducts the affairs of the company during this period?

As it may take some considerable time before your executor is able to make a distribution of the shares from your estate, it is imperative that your Will contain provisions enabling your executor to appoint a director immediately, rather than requiring a distribution of your shares to your beneficiaries.  It is advisable that such a clause be included in your Will.

Under section 201F of the Corporations Act 2001, the executor or personal representative appointed to administer your estate may appoint a new director to the company. The new director has all the rights, powers and duties of the deceased director and can conduct the affairs of the company until the shares of the company are transferred to the proposed beneficiaries, who can then appoint a new director if they wish to do so.

 


Please note, this Blog is posted in Adelaide, South Australia by Andersons Solicitors. It relates to South Australian legislation. Andersons Solicitors is a medium sized law firm servicing metropolitan Adelaide and regional South Australia across all areas of law for individuals and businesses.


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