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14 August 2017 What happens when the sole director and shareholder of a company dies?

By Angela Harvey, Partner and Esther Khoo, Graduate Solicitor

A successful business can come to a crashing halt if the sole director and shareholder dies.  If there is no director or shareholder, the company may become paralysed, face cash flow problems if the deceased was the sole signatory of bank accounts, be unable to pay its employees; or, at worst, be deregistered or wound up.  At the point of death of the sole director and shareholder, the there are two options available to the company – whether to continue the business, or whether the business should come to an end.  

We discuss three key things to know about what happens when a sole director and shareholder dies:

(1) Section 201F(2) Corporations Act to the rescue

If the sole director and shareholder of a company dies, section 201F(2) of the Corporations Act 2001 allows a personal representative or trustee to appoint a person a director of the company. A personal representative is the person who is appointed executor under a will, or the person granted Letters of Administration if there is no will and the deceased died intestate.

(2) When will the Court appoint a director and in what circumstances?

In considering an application for appointing a director after the sole director/shareholder dies, the Courts have generally allowed a person to be appointed director where there was some evidence the deceased intended a particular person be appointed his or her executor. The Court normally considers whether an appointment should be allowed under section 201F(2) and takes a practical approach in making orders that would preserve the estate's assets or allow the business to continue running.

We consider two examples below:

(a) Estate Frumar [2016] NSWSC 1116
The deceased was the sole director and shareholder of his company which ran his ophthalmic practice. The deceased left a note described as "last will and testimony" that appointed the plaintiff as executor. The plaintiff sought a limited grant of administration for the deceased's practice to be sold soonest possible to preserve the value the practice. In allowing the application, the Court noted that the likely beneficiaries of estate agreed to application.

(b) Estate Assim [2015] NSWSC 337

The deceased was the sole director and shareholder and also the sole signatory on the trust account of his real estate businesses. Two issues arose from the deceased's death that hampered the running of the business. First, as there was no signatory on the trust account, rental monies could not be paid out to its clients, which disrupted the actual business. Secondly, there was a potential purchaser interested in buying the real estate business. The Court noted the second purchase issue was not as urgent as the first immediate problem of potential damage to the business' goodwill if monies could not be paid out to clients.

The daughters of the deceased applied to be administrators of their deceased father's estate. The Court granted the application, but placed limitations on their administration, including obtaining an undertaking that the company not be wound up and not to deal with the assets except of in the normal course of business.

(3) Complications where there is no will

However, things get particularly tricky if the person dies without a will. Normally, the personal representative of an estate is the executor of a will. Where the sole director/shareholder dies without a will, someone, usually a family member, has to apply for Letters of Administration. This process can take a long time, and may be further complicated where there are competing persons applying for the role of administrator or if no one wants to apply for the role of administrator.

Another complication arises is if the deceased died intestate and no family member wants to apply for Letters of Administration. If there is no one who will or can administer the estate, a creditor of the deceased may apply for Letters of Administration. A creditor may seek the winding up of the company, and this would bring the company and business to an end.

The complications above emphasise the need for small companies and family business especially to ensure their estate planning is in order to ensure a successful business is not halted just because of the death of the sole director and shareholder of the company.

Angela Harvey, Partner  |  Phone: +61 2 9233 5544  |  Email: axh@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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