In Tax Tip #59 we touched on the differences between a company, its members and its directors when we discussed how a company's obligations can affect its directors. To continue this discussion, we have decided to touch upon Corporate Powers of Attorney, including why they are useful, their pros and cons, and the risks that are posed if directors do not have one in place.
Question: What happens to a company if it's sole director loses capacity without a Corporate Power of Attorney in place? What happens to a two-director company if one director loses capacity?
Answer: If a company's directors lose capacity without appropriate safeguards in place the company's operations will be detrimentally affected by the director's inability to act.
Tax Tip:
What is a Power of Attorney for a company?
Companies are legal entities in their own right, distinct from its members but controlled by its directors. This means that, while a company can do all of the things an individual can do, including entering into contracts, buying and selling property, and carrying on a business; it cannot do so without a director's input.
Section 124 of the Corporations Act 2001 (Cth) gives companies the power we mention above, and this power includes appointing an attorney under a Corporate Power of Attorney document (CPOA). Someone appointed under such a document is called an attorney, and an attorney can do all of the things that the CPOA authorises them to do.
Capacity?
When you hear the term 'capacity' you usually think of a person in hospital due to a serious illness or someone elderly who is suffering from diminished capacity. While these are good examples they are not the only examples. A director might not have the capacity needed to execute legal documents if they are not in the country, if they are seriously unwell, or if they are simply unavailable.
Without a CPOA in place a company's operations can grind to a halt while it waits for its director/s to be available to act. If a company has a single director who loses capacity while also being the sole shareholder, the company is effectively frozen until the director regains capacity, or until an executor or trustee is appointed to manage the director's affairs. If a company has two directors and one loses capacity, the remaining director will not be able to execute documents without the company seal, because the Corporations Act requires two directors to sign when the company seal is not used.
What can a Corporate Power of Attorney do for a company?
A CPOA can be as restricted or unrestricted as the company needs it to be which makes them incredibly versatile tools for managing growing companies. This includes the powers that the attorney can exercise, the terms upon which they are appointed, when they are appointed and when their appointment ceases and the limits placed on them. A CPOA for a company can also be used for a company that is the corporate trustee of a trust; if the CPOA grants the attorney that power.
We have broken the three main uses for CPOAs down into three key areas:
Specific or urgent purpose: a director is travelling overseas for a month and is unavailable to execute documents at that time, so they appoint an attorney to act on their behalf during their absence. This is also useful in scenarios where the company needs to execute documents but the director is sick and cannot attend to signing;
Limited or everyday purpose: a company has operations in both QLD and NSW, while both of the directors live in Sydney. The company can prepare a limited CPOA to grant an attorney only the powers they need to run the interstate portion of the business, such as the power to manage financial matters, open a bank account, or enter into a limited range of mundane and/or recurring contracts;
Contingency: A Corporate Power of Attorney prepared 'just-in-case' for a rainy day. This type of CPOA appoints attorneys while the director/s are unavailable to act and ensures that the company can continue to carry on business while the director/s are incapacitated.
A Corporate Power of Attorney is an important tool for managing your company's operations and ensuring that there are no disruptions or continuity issues. If you are interested in determining whether a Corporate Power of Attorney is right for you and your company, please contact us so our team can assist you.
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