A succession plan is a critical but often overlooked process for companies. In short, a succession plan is a strategy for identifying and developing future leaders at your company, across all levels, and are used to address the inevitable changes that can occur. It allows you to consider all scenarios and prepare for contingencies and minimise the effects when the unexpected happens.

What happens when a Director loses mental capacity?

This situation is quite unique. When a Director loses mental capacity (eg. after a stroke or brain injury, dementia or substance abuse), they will automatically no longer hold the position of Director. Furthermore, in this situation, the Attorney under an Enduring Power of Attorney (EPOA) or the personal legal representative of their estate cannot simply become the director of that company.

Here is the legal process when a Director loses mental capacity:

A Company with one Director, who is also the only Shareholder

  • The personal representative or trustee appointed to administer the person’s estate or property may appoint a person as the Director of the company.

A Company with Multiple Directors and Multiple Shareholders

  • This situation is more complex. Take for example a situation where a company has two Directors and within a very short period of time they both lose capacity, or die. It will be the shareholders of the company who will be able to appoint new Directors by resolution passed in general meeting of shareholders under the Corporations law.

If the incapacitated Directors/shareholders have not executed EPOA documents, then an application will need to be made to the Guardianship and Administrative Tribunal for the appointment of an administrator over the financial affairs of those persons. Once an administrator has been appointed that person will be able to manage the shares of the company and accordingly appoint a new Director by way of a meeting of shareholders.

If an EPOA has been executed the attorney will be able to pass a resolution in general meeting of shareholders and the same goes with the personal legal representative of a deceased person.

Setting up a Succession Plan  

A succession plan should be considered at the very outset of setting up your company, and best practice would be to ensure it’s implemented into the company constitution.

The company constitution should include a mechanism for the appointment of successor Directors to replace a Director who has become incapacitated or died. If you have a company, we at Greenhalgh Pickard recommend you look into this and ensure that a succession plan is put into place to avoid problems for the company in the future. If you require help with this, or would like further information, please contact Shane Ulyatt or John Greenhalgh at Greenhalgh Pickard to seek further advice.