Incapacity can have significant implications for the management and continuity of trusts and businesses. Incapacity can create complex challenges that require careful planning and legal foresight. This article explores how trusts and businesses, including sole traders and companies, are affected when a key person becomes incapacitated and provides strategies to ensure smooth transitions and continued operations.
Impact on Sole Traders
For sole traders, the business is essentially inseparable from the individual owner. The owner is responsible for all operations and decision-making. When the owner becomes incapacitated, the business can face immediate and ongoing operational challenges.
A key strategy to mitigate this risk is ensuring that there is an Enduring Power of Attorney (EPA) in place. Appointing an attorney to make financial and business decisions on behalf of the owner during periods of incapacity ensures that the business can continue to operate. It may be advisable to appoint different individuals for business and personal matters to ensure specialized decision-making.
Impact on Companies
Companies, whether small or large, have more complex structures involving one or more shareholders and directors. Incapacity of a director can disrupt operations significantly. If a company has only one director, the impact is obvious. However, it can be just as debilitating if a company has two directors and one of them loses capacity; under the Corporations Act 2001, a company with multiple directors requires two of them to sign contracts.
Incapacity of a shareholder is less likely to have immediately impacts on the function of the company, but may make it difficult to muster enough votes to pass resolutions or appoint or remove directors.
One strategy is to make a Company Power of Attorney, which appoints one or more individuals to act on behalf of the company. This ensures that business operations can continue even if there are not enough directors available.
The Company Constitution and a Shareholder Agreement may also be relevant; between them, they can provide clear procedures for removing incapacitated directors, appointing new directors, and managing shares during periods of incapacity. Regular reviews ensure they remain relevant and effective.
As a last resort, an incapacitated shareholder’s Enduring Power of Attorney may be helpful in exercising the shareholder’s rights to remove or appoint directors.
Impact on Trusts
Trusts typically involve multiple roles, including trustees and appointors, that either directly or indirectly control the trust. Incapacity of individuals holding these key roles can disrupt the trust’s operations. If a trustee is incapacitated, day-to-day decisions about things such as the trust’s business or investment activities or distributions to beneficiaries may stall. If an appointor is incapacitated, it is likely that removal or replacement of trustees will be difficult, and it may also prevent certain changes to the Trust Deed.
Ideally, each Trust Deed makes provision for succession of these roles in case of incapacity. This may take the form of a list of successor appointors and trustees, or it may simply specify that appointors and successors may nominate people to take on those roles in case of incapacity of the incumbents. In either case, it is critical that these arrangements are regularly reviewed to ensure that the nominations are still suitable and that they would be activated in the correct circumstances.
Some Trust Deeds may allow the Attorney of an incapacitated Trustee or Appointor to act in their place, but this is comparatively rare and should not be relied on without obtaining advice.
Other articles in the Incapacity Series
- The Incapacity Series: The Importance of Planning Ahead
- Enduring Powers of Attorney: What if I can’t make decisions for myself?
- Appointments of Medical Treatment Decision Maker: What if I can’t make medical decisions for myself?
- Guardians and Administrators: What if I lose capacity and haven’t appointed anyone to make decisions for me?
- Statutory Wills: What if I lose capacity to make a Will?
How can Novum Law Group assist you?
In each of these cases, it is easier to get advice and make the necessary preparations ahead of time while all the decision makers have capacity. If a key person loses capacity and arrangements have not been made, rectifying this is likely to be a much more time-consuming and expensive process.
For a free, no-obligation chat about your business or trust structures and succession planning, contact our Wills & Estate Planning team. Please call us on 9063 0300 or send us an email to discuss with one of our lawyers, or click here to make an appointment.
Authors
Sheredyn Legg
