A successor director can save the demise of an SMSF: adviser
If an SMSF does not have a successor director solution in place it could spell disaster in the event of death or incapacity, warns a specialist adviser.
Grant Abbott, LightYear Group chair, director, and founder, said he has seen cases where an SMSF or small business was “run into the ground” in a short space of time where there was no director in place following the death or incapacity of a predecessor.
“The accountants and lawyers to the SMSF or company did not realise that the director’s will is ineffective to appoint a continuing director,” Mr Abbott said.
“For this reason, I advise all company clients and SMSFs to ensure that a successor director is in place.”
Mr Abbott said there are around three million companies in Australia, many of which are small businesses and companies that act as a trustee for a discretionary family trust or SMSF.
However, many do not consider what may happen to their SMSF or business when the sitting director dies or becomes incapacitated.
“Things that can go wrong include the business failing, it goes into hibernation until Supreme Court action is taken to install a new director or trustee, it could be taken advantage of by existing directors,” Mr Abbott said.
“Lawyers could also seek to make claims against the estate lock up the company or put in place favoured director, and specifically in the SMSFs, the ATO may install its own directors.”
Mr Abbott explained that a company constitution and rules – not the will or any enduring power of attorney – may provide for a person known as the successor director to take over from a sole director or a director on a board when the current director is sick, dies or is subject to litigation including divorce or bankruptcy.
When this happens, the current director is automatically removed and the successor director is appointed.
He gave an example of John Smith who runs his trading company as a sole director. John has 10 staff and is very involved in his business, but his staff do know what to do to keep the business running.
“He is also the director of the trustee company for his family trust and self-managed super fund. John dies in an accident and leaves behind a business, wife and two young children,” Mr Abbott said.
“John’s family wealth is exposed as are all of his structures. Who will pay the bills? Will his family be able to access any money – even for the funeral? And this is only the tip of the iceberg – wait until the bank starts to threaten foreclosure on the family home from lack of funds.”
Fortunately, in this example, John’s accountant has put in place the successor director solution for all his companies and on his death, his brother Nigel is appointed as successor director the next day to keep an orderly transition of the business, the family trust and the SMSF.
To put in place the successor director solution, Mr Abbott said it’s important to first upgrade the company constitution to enable that to take place.
The next step is to complete a binding resolution, signed by the current director or directors, which will auto-install the successor director in the event of death, disability, bankruptcy, litigation or for any other reason.
“There is no need to inform ASIC at this time but if it is used then ASIC is an important cog in the wheel,” Mr Abbott concluded.
