In the ordinary course, the shareholders of a company are responsible for appointing new directors when there is a vacancy. The directors are responsible for making day to day decisions for the company.
A danger specific to sole director sole shareholder companies is where the relevant individual becomes incapacitated or dies. In such circumstances, not only is the day to day decision maker unable to act, but there is no other person at the shareholder level who could take immediate action to rectify the situation by appointing a new director. The company may grind to a halt in the short term – which could be detrimental to business.
A solution presents itself in section 201F(2) of the Corporations Act 2001 (Cth), which provides that if a sole director and sole shareholder of a company becomes incapacitated or dies then their “personal representative” may appoint a new director of the company.
“Personal representative” could mean:
- if the sole shareholder sole director has died, then their executor or administrator; or
- if the sole shareholder sole director becomes incapacitated, then their attorney or financial manager.
Section 201F(2) is most effective if the relevant individual has a Will and an Enduring Power of Attorney in place. In those circumstances, the executor or attorney can act immediately to appoint a director, relying on the authority of the legal document that makes the appointment. This is likely to leave the company in the best position to continue its activities.
However, if there is no Will and no Enduring Power of Attorney, then an interested person will need to apply, either to:
- the Supreme Court for Letters of Administration to become the administrator of a deceased estate; or
- the NSW Civil and Administrative Tribunal for a financial management order in respect of the sole director sole shareholder.
Those applications may take weeks or months before the interested person is given authority to act as a personal representative. Consequently, the company will be in limbo until such time as the authority is granted.
For this reason, it is particularly important for persons who are sole directors and sole shareholders have a Will and Enduring Power of Attorney in place.
One Hit Wonder
The section 201F solution is a one hit wonder: once the personal representative appoints a director, then they have no further ability to appoint directors of the company.