A complete estate plan for a family in business must consider a power of attorney for all companies in the group. A power of attorney is an instrument that gives authority to another person to act on behalf of the principal. An individual power of attorney gives your attorney legal authority to manage your assets and financial affairs when the individual is unable to do so due to illness, accident or absence. A company power of attorney authorises a person or persons to act on behalf of a company and or sign certain documents on its behalf.

We answer five common questions about company powers of attorney below:

  1. WHY GRANT A POWER OF ATTORNEY?

Every company should consider having a company power of attorney in place to ensure continuity of company affairs and good stewardship of the company. Powers of attorney are critical in a sole trader or two director company where every person is a "key person". For sole traders, if the director is away (whether on holidays or work trips) or loses capacity to sign documents (perhaps due to illness or accidents), the business could come to a grinding halt as no one is authorised to sign off on cheques or key documents, likely affecting cash flow of the business.

This is problematic even for two director companies. Often, this structure is seen in many family businesses where both mum and dad are directors. Section 127 of the Corporations Act requires two directors or a director and a secretary of a company to execute documents. This means that if even one person loses capacity, the company is powerless to sign documents or enter into agreements as the law requires a minimum of two signatures. A company power of attorney can fix this problem.

  1. WHEN TO GRANT A COMPANY POWER OF ATTORNEY?

When granting a company power of attorney, you should consider the scope of the power based on when the power applies, in what decisions or the type of situations your attorney may need to step in. Below are three examples in considering the scope of the power:

  1. Limited power for routine transactions - A company may wish to grant a limited power of attorney to complete recurrent routine transactions to avoid the hassle of two directors having to sign. For instance, you may grant a power of attorney to sign off on routine transactions. This could include signing off on rental invoices or certain bank documents.
  2. For specific purposes - Alternately, a company may grant a power of attorney allowing the attorney to execute and complete a whole transaction. This may be useful where there are many moving parts to a transaction and pre-prepared board resolutions may not have anticipated all parts to the transaction. In particular, this strategy allows flexibility for a director who may be overseas during a complex transaction, but where the company needs to urgently sign off on documents.
  3. General powers – A company power of attorney may also be useful in case of unexpected contingencies, for instance, if a director dies or loses capacity, due to illness or accident. This allows for businesses to continue running in stressful situations until a succession plan can be put in place.
  1. CAN I USE AN INDIVIDUAL POWER OF ATTORNEY FOR COMPANY MATTERS?

No, a key reason why company powers of attorneys are so important is that an individual power of attorney is not a substitute for a company power of attorney. Even if you have granted a power of attorney to someone to manage your financial affairs, this does not extend to your company and the attorney cannot sign documents on your behalf in your capacity as director of a company.

A company power of attorney can be granted to a person or persons. As the company power of attorney is unique to your company, you should consider who would be a suitable attorney for your company.

  1. WILL I STILL BE LIABLE FOR THE ACTS OF MY COMPANY'S POWER OF ATTORNEY?

A director will remain liable for an attorney's actions as an attorney acts as a principal's agent. In some circumstances, this may not be ideal for an existing director – in these circumstances, you may consider appointing an alternate director instead. To reduce liability and promote accountability, the company may want to consider appointing two persons to act jointly, to act as check and balance to each other.

  1. HOW DOES THE COMPANY POWER OF ATTORNEY INTERACT WITH MY WILL?

A will is not a substitute for a company power of attorney, because a will only comes into operation after a person dies. A company power of attorney can be used to ensure the smooth operation of the company after the death of a director, but before the executor under the will has had the opportunity to administer the estate (which estate may include shares in the company). We previously discussed what happens if a sole director/shareholder dies here.

In conclusion, a power of attorney should be part of any savvy business' risk management strategy to avoid a signatory limbo and for the long-term stewardship of your company. We can assist you with drafting your company power of attorney to ensure your business is well-taken care of, but with proper boundaries in place.

For further information please contact:

Angela Harvey, Partner
Phone: +61 2 9233 5544
Email: AXH@SWAAB.COM.AU

Esther Khoo, Graduate Solicitor

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.