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

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.