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The Importance of a Successor Director

The key part of succession planning is to ensure that you maintain control of any companies you are a Director of if you are incapacitated in any way, or if you die.

For example, if you are the sole director of any company, to ensure your companies can continue to operate you need to put documents into place NOW to nominate your successor director so your family can maintain control of these companies. If you are a director in a multi-director company, again, you need to put documents into place NOW so that your family “vote” will ensure that the other directors can’t make decisions that are prejudiced against your family.

Why it is important to have a Successor Director?

The appointment of a successor director to a business is essential for the seamless succession to a director’s role in many family and private companies. 

In most company constitutions, the shareholders appoint the directors. However, in many family and private companies there are either two directors who hold minimal shares each. Thus, if either director loses legal capacity or dies, the remaining director/s of the company will effectively control the ongoing affairs of the company and decide who will be paid the deceased’s death benefit if the company acts as trustee to a Self-Managed Support Fund. In this case, as each spouse has a 50% vote, a director who has lost capacity or died, will generally not have any legal right to have someone represent their interests.

During the period when there is no director, the company may be completely unable to operate. With no one properly authorised to make management decisions or act for the company, it may be unable to trade. Banks and other financial institutions, in particular, may be unwilling to accept instructions in relation to a company’s trading account if they are not satisfied there is someone properly authorised to act for it.

Equally, staff and suppliers may not be able to be paid, which can quickly have a disastrous effect on the reputation and value of the company to the beneficiaries of the estate.

The Solution

Concepts & Results have a solution within its Succession, Asset Protection and estate Planning Division that will enable a director to nominate someone who takes their role in the event they are unable to hold a directorship. The appointment of a successor director is relevant if there are separate beneficiaries who will ultimately benefit upon the death of the director then having someone represent their interests if they lose their capacity is advisable to ensure their benefits are dealt with in the most appropriate manner.

What Do You Need To Do?

Successor Director Solution

  • The company constitution must include the ability of a director, with the prior agreement of the board of directors, to appoint a successor director
  • Sep one: Upgrade the company constitution
    • Upgrade is complete under section 136 of the Corporations Act through a shareholders meeting
    • The old constitution disappears and a new replacement implemented
    • Choose the company from trustee companies to trading companies
  • Step2: directors resolve to appoint a successor director for one of the directors in the event of the death, incapacitated, bankruptcy, imprisonment or not available, who is overseas or does not want to act as a director anymore

Does The Successor Director Have Assets That Need Protecting?

Does the successor director have assets in their name that might become exposed when they are appointed?

In most family groups, one person will be the “risk taker” and the other will be the “asset holder”. The risk taker will be the company director. And the asset holder would normally be the successor director.

But once the asset holder is officially appointed a successor director then the assets in their personal name become at risk.

The Solution

Right now, before the successor director becomes an appointed director of a company, you need to do an asset protection review of the successor director and put into place asset protection strategies for them.

If the successor director holds any property or valuable assets in their name, we should consider a Protector Trust to protect their assets. (The Protector) Using “The Protector”, you can protect the value of the successor director’s assets without incurring stamp duty, or triggering any capital gains tax payable.

3 Key Steps Successor Director Must Take

  • Establish a family protection trust with the successor director being the leading member of the trust and the corporate trustee company.
  • The successor director can gift their equity in their chosen assets to their new Family Protection Trust.
  • The successor director’s trust then provides an immediate loan back to them of the equity amount and takes security over their assets (e.g. a registered mortgage over a property) to provide protection for the loan.

The end result is that the successor director’s net equity in the assets that they choose is now held by the Family Protection Trust is not in their name.

With little or no assets in their name, most lawyers would not bother trying to take legal action against a successor director, because even if the lawyers win the successor director does not have any assets in their name that could be taken as a legal settlement.

Click the following link to lean more about The Protector.


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