If you are a director of a company and you lose capacity, the management and control of the family business may be significantly affected. Simply having an Enduring Financial Power of Attorney (POA) is not a fix all solution that replaces proper succession planning.

If you are a sole director and shareholder of a company which runs your family business, the Corporations Act 2001 provides that upon your incapacity, you are deemed to have vacated your position as director, and your attorney may appoint another person to act as director, including themselves.

Note however that:

  1. your attorney doesn’t automatically become a director of the company in your place, a director is a personal appointment by the shareholders; and
     
  2. in exercising their powers, an attorney cannot make decisions in the best interest of the family as a whole – decisions have to ignore such considerations and only be in the best interest [read “financial interest”] of the person who granted the POA.

The following scenario is not uncommon.

Your family business has Dad, the patriarch as the sole director and majority shareholder, along with other shareholder family members. Dad loses capacity and has appointed his son and daughter as his joint attorneys. The son and daughter are also shareholders and employees in the family business. In the past few years the father has taken a step back from managing the family business and his son and daughter have taken on greater management roles, the assumed natural progression is they will eventually become directors of the company, but no formal plan has been put in place.

Remembering that an attorney must not benefit from their appointment, can the two children use the fathers share voting rights to appoint themselves as directors of the company, noting this was the likely intention of the father?

The issue is the attorneys will be required to make management decisions on issues such as terms of their employment, wages and profit distributions that will benefit them, possibly to the financial detriment of their father.

In many cases, your attorney will be your spouse or a child who has a significant personal interest in your replacement as director, and the voting rights over shares. Accordingly, there can be significant limitations on the ability of your attorney to consider the overall financial position of family members rather than the financial interest of the grantor of the POA.

Having a detailed shareholders agreement, family constitution, documented succession plan and specifically drafted POAs can avoid a lack of control and direction of the family business in the period between loss of capacity, and the death of the patriarch or matriarch.

Next week we will look at issues and solutions for when individual owners lose capacity.

For more information contact:

Dan Simmonds
Managing Principal
Harwood Andrews
T: 03 5226 8513
E: dsimmonds@harwoodandrews.com.au

Rod Payne
Principal
Harwood Andrews
T: 03 5226 8541
E: rpayne@harwoodandrews.com.au

Ashleigh Wall
Senior Associate
Harwood Andrews
T: 03 5226 8559
E: awall@harwoodandrews.com.au