Incapacity of Directors and Trustees; When Powers of Attorney Don’t cut it!

Ask a company director or trustee of a superfund what will happen if they become incapacitated and most will point to their recently executed Power of Attorney document saying “the problem is handled”.
Unfortunately that is not likely to be the case.
Directors of proprietary companies (including trustee companies) and individuals acting as trustees of discretionary trusts or SMSFs need to be aware that in cases of incapacity, an Enduring Power of Attorney will NOT be effective to:
  • allow the attorney to step into the director role; or
  • give the attorney decision making power if they are a trustee of a discretionary trust or SMSF.
So what’s the solution to allow seamless leadership transitions in these types of cases? A substitute decision maker must be appointed whilst the incapacity exists.
For these types of office holders, alternative arrangements that can be made include:
  • having the company execute it own Power of Attorney and directly appoint its own attorney;
  • installing an alternate director (whose power to act only takes effect upon the incapacity of the current director);
  • in circumstances where an incapacitated Director is also a shareholder, have the Attorney use its votes as a shareholder to vote in a replacement director (this could be a short term fix in the case of a trustee company where a trust deed gives an appointor the right to remove and replace the current trustee).
This is niche area of law, with traps for the inexperienced. Some further food for thought:
  • For a small proprietary company, in most cases the process of installing a substitute Director will be covered by a company’s constitution. 
  • For trustees, the trust deed itself will usually provide guidance on trustee incapacity and where it is silent on such matters, sections 48-50 of the Trustee Act (Vic) 1958 may be of assistance).
  • A power of attorney seeking to allow the attorney to exercise the powers of an appointor under a trust deed should expressly specify such powers.
  • A SMSF remains compliant if the legal personal representative (including an attorney) takes control of the fund during a period of incapacity of the member/trustee however the appointment must still be effective in accordance with applicable deed and regulations (see SIS Act 17A(3)(b)).
If you are a director of a proprietary company or SMSF, you should think seriously about leadership continuity in cases of incapacity. Feel free to call Anthony Snooks or Chelsea Jenkins of our office to discuss such matters further.

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