If you want to ensure that a particular family member or colleague becomes the new director of your company when you pass away, it is important to consider effective estate planning. If you are involved with a private company (the type with ‘Pty Ltd’ at the end) then this information applies to you.

• You might be the trustee of your family trust; or

• The trustee of your self managed super fund; or

• You might simply be the director of the company that operates your small business; or

• A combination of the above.

You might be the only director, or your spouse, or some of your kids… or even your business partner might be the other director/s.  You control the company via the shares you own in the company, because in a standard company constitution the shareholders control the appointment and removal of directors.

Now let’s suppose that you want a particular person to become the director of your company when you die. Whatever the reason, its important to get it done right, to give you peace of mind now and into the future.

Okay, so what do I have to do?

The main problem with ‘directorship’ and the right to be a director of a company is that it is not considered ‘property’ under our system of law. ‘Directorship’ is not an asset that can be owned.  It is simply an office position to which a person is appointed.

Unfortunately you can’t just say in your Will “I give my directorship in my company to my daughter Alex“.  That’s like saying “I give the Presidency of the local cricket club to my son” . There’s nothing to give, because these things are not transferable assets, and on your passing you cease to hold your office positions.

So, if you want to properly appoint a successor, you must firstly work out how to do that within the scope of the law, and the rules that apply to the operation of companies, and then secondly ensure that the other shareholders and directors in the company cannot undermine your estate planning wishes.

Sole Director Companies:

If the company is a sole-director/one shareholder company, then things are a lot easier. In this situation you give the shares in that company to the person you want to become the director and they can vote to appoint themselves as director.

Section 201F of the Corporations Act 2001 (Cth) is relevant here, and depending on the circumstances can be either positive or negative.  This section allows a deceased director’s Executor to appoint the successor director, including themselves. This power would be subject to the ability of the successor shareholder appointing the director, so would only have effect if you haven’t made that gift of the shares in your Will or you have directed that those shares be held by the Executor.

So in single director/shareholder companies, it’s best to specifically gift the shares and not leave it up to others to decide what will happen to them.

Companies with Multiple Directors:

In companies where there are more than one director and shareholder, things get more interesting.

Clauses or statements in the company constitution, or SMSF/Family trust deeds do not necessarily have the powers at law to ensure that the person you have chosen to take over your directorship will be appointed. For example, if you don’t give that person a majority shareholding, then the remaining shareholders can change the constitution, to avoid this occurring. This can be the same with a trust deed.

A trust deed is the ‘rule-book’ for any SMSF / Family trust.  It does not have the power to deal with corporate issues relating to the trustee any more than the constitution of the company can outline the terms of any trust that the company takes control of.  These are separate structures with different roles… and separate documents are not capable of dealing with one another’s issues.

You can put a clause in the company’s constitution appointing the successor director and making that clause unchangeable.  But what often happens is that every so often you decide that the constitution is out of date and should be completely changed, and you adopt a whole new constitution not remembering the successor director clause.  Is the change then effective? Does the original clause carry over to the new constitution?  By what mechanism? Off to court you would have to go for directions.

There is even a view that you could put the same sort of clause in the trust deed, but the same arguments apply as to whether the deed has the necessary power over its trustee and what would happen if the deed is amended ‘in globo’.

So if you can’t do it by Will, constitution or trust deed how can you appoint your successor director with any confidence?

The answer lies in making the appointment now, stipulating that it will only take effect on your passing and ensuring that the appointment can’t be changed by the other shareholder directors when the time comes.

Pass a shareholders resolution appointing the successor director. Also consider: do you need a substitute appointment in case the successor director is unavailable at the time?

Ensure the successor director signs a consent to act as director in the appropriate form.

If the company is the trustee of a self managed superannuation fund ensure the successor director signs all the necessary ATO forms and declarations to become a director of an SMSF trustee and is not a disqualified person.

State that the shareholders resolution is irrevocable without your consent which right to consent dies with you (so your Executor can’t consent to a change in order to stymie your appointment).

Don’t use directors resolutions because directors are much more limited in their power to fetter their future acts as a result of their obligation to comply with their considerable statutory and common law directors duties.Importantly, have the other shareholders execute a deed declaring that they will give effect to your appointment when the time comes.

If shareholders change before the appointment takes place you may need to renew the deed with the new shareholders.This process is clearly cumbersome, but it may be the only way that you have any chance of stopping the other shareholder directors from getting around your appointment for whatever reasons they may have.

For further information, or to book an appointment to ensure your business/trust affairs are in order, give Humble Goode Financial a call on 08 7477 8252 or email planning@hgfp.com.au