If you are the proprietor of your own business, the idea that your business ought to eventually be sold and distributed amongst your beneficiaries may seem like an obvious course of action. In many ways, this is true. The distribution of an estate can be a difficult task at best, and passing on a business to someone who may be altogether unfamiliar with it could very easily result in a loss of that business’ overall value.
Fortunately, dissolving and selling your business upon your demise is not the only course of action. Efficient estate planning can allow for a seamless transition of ownership and provide your family and friends with an on-going source of income. This being said, a number of steps not often contemplated in run-of-the-mill estate planning may be required. Principal among these steps is the effect of an enduring power of attorney on your business.
Enduring Power of Attorney
In the event that you lose your mental or physical capacity, many wills include the potential for an enduring power of attorney – that is, appoint someone who can act in your best interests on your behalf.
Power of attorney can become a troublesome issue if you are the director of a company. In 1999, the Supreme Court of New South Wales held that the office of a company director was a personal responsibility and not one that can be substituted or delegated by the person holding that office. The effect of this decision is that a person given the authority to act on your behalf through an enduring power of attorney will not be able to carry out your duties as director. Understandably, if you are the sole director of your own business or company, or simply one of a handful of directors, this may leave both you and your business hamstrung.
The solution to this particular problem is to speak with the other directors of your company and arrange for a contingency plan, which, upon your incapacity, votes in the name of the company to grant a person power of attorney over your directorship.
But Why Go Through All That Bother?
Although all of this seems a strange and unnecessary legal requirement, its foundation lies in risk management.
Directors are, under the Corporations Act 2001 (Cth), responsible for their company and by extension, for their shareholders. An individual director cannot make a decision that may affect the company without the approval of the company itself (as expressed by the votes of other directors). By following the rulebook, you shield your nominated executor from having to needlessly deal with claims that your actions were an attempt to subvert the interests of the company.
It goes without saying that in smaller, more tight knit businesses, the risk of these claims arising are fairly small. This being said, good estate planning involves anticipating risk and acting on it before it ever arises, and in the context of business, greater fortunes have been lost to far, far more remote risks.Mancini v Mancini NSWSC 799, per Bryson J.