Tara (00:51):
Hello, welcome to episode 62. I am your host Tara Lucke. And can you guys feel Christmas in the air? Is it just me?
(01:04):
I have a bit of a downer actually to talk to you about now that the Christmas season is upon us and it is for all of the soul director or sole practitioner, law firm owners out there listening. So I really hope that you have all got some exciting plans for the Christmas and New Year holiday season break. Perhaps you are even travelling or going overseas. You've got a road trip planned. We all know that historically this festive season can be some of the most dangerous of the year. And I guess with that note, not that I want to be bearing the tidings of bad news, but this is a podcast talking about death. So I want to make sure that everybody listening has got everything in place that they need for their contingency planning, especially where you are running your own firm or your own business.
(02:09):
So this actually applies if you're a financial advisor, an accountant, and you are a sole practitioner or sole director, and even for all of your clients who are sole directors as well. But I'm going to focus on our lawyers running their sole practitioner firm, and I'm particularly going to focus on the sole directors of the incorporated legal practise. So I want you to ask yourself, I'm assuming that you have got your wills and your enduring powers of attorney and your super nominations in place. Surely you have, I'm going to give you the benefit of the doubt, but one document that even professionals sometimes overlook or just leave to down the track is their power of attorney for their trading entity. And this might be overlooked because you've changed entities and there's just so much going on with everything else that you need to do from a compliance perspective that you've sort of just put this on the back burner or maybe you won't actually even aware of it.
(03:18):
So I want to just talk to you about the fact that the take home message for this episode is if you are a sole director of a trading company, then you need a power of attorney for your entity. Now this also applies for trust. So if you've got a corporate trustee where you are the sole director, that also applies. It potentially also applies for companies that have two directors and where one of the directors is still a director, they haven't been disqualified or retired, but they're not available in the jurisdiction or not actually able to exercise their duties. There's a use case for that as well. But I'm just going to focus on the very clear message for sole directors. So what is an entity power of attorney? It is a power of attorney that your company, whether they're a trading company directly or a corporate trustee trading for a trust doesn't really matter that that company appoints to act on its behalf.
(04:27):
Now, some people think that the attorney that the company appoints can replace the directorship. That's not quite right. The directors remain, they continue to hold all of their powers and authorities and duties. The attorney is appointed for the company. So if we think about the context of a company that has four directors and you appoint one attorney for the company, then think about that company executing a deed. So you can have two directors signing that deed on behalf of the company or a director and a secretary under the Corporations Act, or you can have that single attorney signing on behalf of the company under a execution clause that says pursuant to the power of attorney. So it's not that the attorney steps into the shoes of individual directors, it acts on behalf of the company as a whole. Now, why do we need this? Particularly in the case of a sole director company, if that director loses capacity or dies or is out of the jurisdiction, we need somebody who can step in right away to act on behalf of the company to keep the everyday activities of the company going.
(06:02):
So I like to think of it as a short-term triage plan for the company so that if you've got staff who need their wages paid, if there are bills that need to be paid, things where a bank account needs to be accessed, the attorney can do that and keep the activities going. If you particularly have a business where contracts need to be entered into, particularly if it's not in the case of a law firm, but in the case of a trading company where they might have a lot of supplier contracts or purchase orders or something that you've got someone authorised to continue to contract on behalf of the company so that it doesn't come to a grinding halt in terms of that pipeline of contracts and deals coming up. If you have lost that director who is a key person in the business, which is extremely relevant for professional services firms and law firms, then you need an attorney to be able to hire a replacement team member or staff member to be able to take the reins and keep going and basically just keeping the lights on and all of those routine activities going for the company while the longer term succession plan of the company is resolved.
(07:31):
So let's talk a little bit about what happens when we've got a sole director who loses capacity because a lot of people think that the enduring power of attorney for the director can just step into the shoes of that director and that is absolutely not the case. They're sort of right in a roundabout way in two angles. So the first one, let's just say we've got a shareholder and a director. So shareholders appoint the directors of the company under the Corporations Act. Other directors can appoint directors as long as it's ratified by the shareholders. But the sort of baseline position is that the shareholders or members of the company appoint the directors. So you can have the shareholders personal and during power of attorney act to pass the resolution to appoint a new director. That still takes a little bit of time including notifications to asic.
(08:39):
But in the event of incapacity, you can as long as you do your resolutions and have all of the paperwork, it's a fair bit of paperwork, but you can do it pretty quickly. Let's say our sole director has actually died. So our enduring power of attorney is no longer applicable. What we're looking for is our executor who is the legal personal representative under the will. So it could be the executor or the administrator, I'll just refer to legal personal representative to sort of include both of those terms. Now, to have an authorised legal personal representative, you have to go through probate and that can take time. Even a fast probate depending on your jurisdiction can take several weeks. Now you might have an executor under a will that's uncontested where they might say, I'm pretty confident that I am going to be the executor authorised under the grant from the Supreme Court.
(09:40):
So I am going to in that capacity now pass the resolution to appoint a replacement director. But they're technically not meant to do it until the grant has been issued from the court, right? So that could actually take a really long time where you can't go through the Corporations Act process to replace the director. Now, I'll just remind you, we do have section 201F for everybody going. What about 201F? Yeah, we've got 201F of the Corporations Act, and that is where you've got the same person as the shareholder and director of a company that does allow the legal personal representative to Disap appoint the new director. But again, we've got this concern where we have that person dying about who is our legal personal representative. So the power of attorney is our immediate fast and short-term solution, allowing a representative to be appointed or an agent is probably the better term, an agent to be appointed for the company to deal with third parties and keep the everyday activities of that company going while we're waiting for the Corporations Act mechanics to be implemented for the long-term succession plan.
(10:57):
So just to recap, a director's personal enduring power of attorney does not allow that attorney to act for the director. You need a company power of attorney, also an alternate director nominated for a director. That appointment ends when the director is removed from being a director. So if they're disqualified automatically by death or incapacity or some other reason or they resign, then the alternate director no longer acts whereas the attorney for the company endures. So I also just want to clarify, an attorney is not the same as a director. The attorney is the agent for the company. So you might be wondering, and I actually recently had been trying to wrap my head around and ended up actually engaging a corporations law specialist to really talk me through it from a practical perspective. Because you might be thinking, well, and this is what I was thinking, what happens with our sole director company where there's no director for the company and we've got this intervening period where there's no director because they've died.
(12:16):
If we refer to section 201A of the Corporations Act, it expressly says Sub one and proprietary company must have at least one director. Now there's other requirements and a public company can have three and that type of thing, but we're mostly talking about just proprietary limited companies. So they need to have one director. So what happens where there's no director because the director has died, but we have a validly appointed power of attorney for the company. So this is the guidance that they gave me. Yeah, you've got no validly appointed director to exercise the powers of the company where the sole director has died. The company may potentially be exposed to compliance action by asic, but in practise there's typically no fine or real consequence. One of the consequences could be that if the company is not meeting its obligations with creditors that creditors apply to put the company under external administration.
(13:15):
So there can be just a lot of practical consequences. Third parties may also be hesitant to deal with a company where there's obviously no director. Importantly though, breaching 201A and having no director of the company does not terminate the appointment of a power of attorney for the company. And there's no express prohibition preventing the attorney to act for the company when there's no director. But it is really important that we remember the attorney is an agent for the company. They're not a substitute director. So there's some things an attorney cannot do for the company because it is actually something that is unique to the director only. So you can't lodge forms with ASIC on behalf of the company. You cannot in some jurisdictions to deal with land and real property owned by the company. You have to have your power of attorney deed registered and the attorney in some jurisdictions will not be able to actually register that power of attorney deed with the relevant titles office.
(14:26):
So that's something the directors have to do. An attorney cannot obviously call director meetings and make resolutions that the directors must make and you know, may run into concerns with third parties not wanting to contract if you're in the middle of a business sale, that could really put the purchaser off. Financiers may be concerned about meeting or new lending, that type of thing, but the attorney can still pay wages, deal with employees, sign contracts in the normal course of the business, just generally pay the bills and keep the lights going. And let's talk about it in the context of a law firm specifically because what happens if you are a sole practitioner of your law firm and you die or lose capacity? So I've got some helpful information sheets from both the Queensland Law Society and the Victorian Legal Services Board. They both have contingency planning information sheets, which are a really good resource if you're in those jurisdictions.
(15:40):
So in Queensland, what typically happens is law care and LEXION and the QLS, the Queensland Law Society will get involved to help triage the situation with clients if you as a sole director die. But they really emphasise that if you are an incorporated legal practise, so that's a company trading as a law firm or a corporate trustee of a discretionary trust trading as a law firm, you need to have a power of attorney for your entity in place or they cannot help you. So in this contingency planning checklist by the Queensland Law Society, they emphasise that they actually cannot step in and take care of everything for the law firm unless there is an attorney for the trading entity who can appoint them to do so because if you think about it, how are they going to get access to all of that confidential client information?
(16:50):
There's duties to the court and the client to consider legal professional privilege dealing with staff. They need somebody to act on behalf of the company to authorise LEXION to step in and do this. And one thing that is really worth bearing in mind, so both under section 106 of the legal profession uniform law, which applies I think in New South Wales, ACT and Victoria and also section 119 of the Legal Profession Act in Queensland. I haven't gone and looked at the other states, apologies if you're in a state that is not Queensland, a CT, new South Wales or Victoria. But under those states, if you cannot have a trading firm without a principal practising certificate holder for more than seven days, if you go more than seven days without someone holding a principal practise certificate, the firm must stop providing legal services. So that's the case, even if you're a sole practitioner, but you have staff who can continue, you can't provide legal services.
(18:05):
So you have to act really swiftly and like I said, you're not going to get probate within seven days. So like in Queensland, the law society and Lexi are saying, if you don't have someone authorised to step in and engage us to triage the firm and sort everything out, then we can't do it. You just have to appoint an administrator or manager under the legislation to basically wind up the firm. So there's just really no scope for them to do anything. I'm just looking here at the guidance, the practise contingency planning policy by the Victorian Legal Services Board and Commissioner and they too have some really helpful guidance. In particular, they emphasise in this policy that if you do not have a power of attorney in place, then they will need to appoint a manager to the law practise under the uniform law. And this is exactly what they say in their policy.
(19:12):
This is a lengthy, disruptive and very costly process requiring a legal practitioner to conduct a full audit of the law practise before either attempting to sell or refer all active clients to other legal practitioners. To date these interventions have cost an average of $40,000 each with the law practise or the practitioner's estate being liable for these costs in the first instance in accordance with Section 365 of the Uniform Law. So the idea that the power of attorney for the incorporated legal practise means that someone can be appointed to step in and triage the plan without having to appoint a manager. Now I'd want to just clarify, it gets really messy if you are a true sole practitioner. So I've been using the phrase sole practitioner to sort of refer to a sole director of an incorporated legal practise like a company or the trading as a firm or as a trustee of a trust.
(20:18):
But if you are literally a sole practitioner, firstly what are you doing because you have got no limited liability from a risk perspective, no ability to retain profits. So it's really not ideal from an asset protection or tax planning perspective, but also it gets really messy with your succession planning. So with the company being able to appoint an attorney, you can someone who is suitable. So in the Victorian Legal Services Board policy, they're encouraging you to appoint somebody who is a solicitor who holds a principal practising certificate. Queensland says it's actually fine for the attorney to not hold a principal practising certificate as long as they can go and engage and employ someone in the firm who does hold a principal practising certificate to step in and satisfy that requirement of you needing someone in the firm within seven days. So you don't necessarily have to have someone who holds the principal practising certificate, but it is helpful.
(21:32):
So that might mean that you want to have one person, like a really good professional friend, be that attorney for the law firm trading entity, but then you will have your spouse or your family members who are not holders of a principal practising certificate actually managing your personal estate. You really might want to separate out who's sorting out your personal affairs under your personal enduring power of attorney and who's the executor of your will and then nominate someone in the professional sphere to step in relation to the law firm. And I should know if you're like, oh, that sounds so overwhelming, I completely acknowledge that it is. Obviously you making this decision and taking the steps to put the contingency plan in place is so much better than your layperson family members having to get their head around it and sort it out. And if you are feeling intimidated, I just want to share a little idea that's happened in the TT precedents Club where we talked about this a couple of years ago.
(22:41):
We did an in-depth training on it and it comes up all the time in our weekly discussions, but we've actually had a lot of members of the TT Precedents Club connect and make reciprocal appointments in relation to their firms. So if they know someone from the TT Precedent's Club who's in a similar area and they know they share a similar philosophy around the way that they practise, they've appointed each other under their power of attorneys for their law firms so that they know they've got someone trustworthy who can step in and take on the role for them. So I just think that's really beautiful and what an incredible way to see collaboration and connection over competition. So there's always that community that you can tap into if this is feeling like you've got nobody. But I want to wind back to what happens when you are just practising in your sole name as a individual sole trader, sole practitioner.
(23:43):
So remember, your enduring power of attorney that you make in your personal capacity can actually step in if you're alive, but you've lost capacity. But I would make sure that you expressly include specific authorizations in relation to the law firm and particularly in relation to remuneration by the law firm and a lot of express powers for them to engage with your legal services board or law society in your jurisdiction. And you're just going to have to sort of accept the fact that it's going to be potentially messy, that your financial power of attorney will have to be someone who's across what's going on in your law firm and your personal affairs. So you can't separate out the two if you die. And I think the Victorian Legal Services Board policy is helpful in this respect because they actually say, remember, if you die, then your personal enduring power of attorney does not apply and we're looking at your personal representative under your will.
(24:50):
So you may need to actually appoint this person as a co-executor under your will, which could really be far from ideal. So if you're sitting here going, oh, that's me, I am the sole practitioner, make sure you've got the right powers that you need in your personal enduring power of attorney and you've appointed the right people for your will as your executor. But I would perhaps encourage you to talk to your accountant about rolling over into a incorporated legal practise company or other structure like I run my law firm through a trading trust with a company as the trustee. So have a look at what's possible in your jurisdiction and maybe just look at if you're serious about your firm, then looking at getting the right structure in place to support that serious intention. We'll go back to just assuming that we're using companies to run our firm rather directly or as a corporate trustee.
(25:54):
But the things that you will need to consider there is having in your power of attorney deed very express powers to sort out and triage your firm if the worst happens. And I don't want you to be overwhelmed because we have a solution for you at the Art of Estate planning. So a few years ago I put together our precedent pact, which we call the entity Power of Attorney Pact, and it is a power of attorney deed that works for companies, trusts, self-managed super funds, and the idea is it is a solution for estate planning lawyers to put in place for their clients who have trading entities. But we also recognise that everyone who is running their own law firm as a sole director will also need this for themselves. So we built it out so that the single precedent pack can be used for your clients, for their succession planning, but also for you and your law firm.
(27:00):
So you'll see within it, we have extensive user notes and powers about what you need to include if you're running a law firm. So for instance, some of the powers that you need to make sure that there is a charging clause so that the legal practitioner director who steps in to replace you can be paid and remunerated, including if they're your attorney. So remember, you can either have the attorney hold the principal practising certificate and step in or perhaps in Queensland your attorney can hire someone who has the principal practising certificate and pay them like an employee. So we need to have appropriate remuneration. We need to have triggers and conditions around the appointment of this person potentially being conditional on them continuing to hold the principal practising certificate or they're no longer an appropriate attorney. So we'll have contingency and succession plans for the attorney to make sure that it's always someone who holds the principal practising certificate.
(28:06):
If that's what was required in your jurisdiction, we will have authorizations for them to liaise with your professional organisation in your state to be able to engage them, to step in to develop the triage plan and manage all of the client matters and to audit and refer out and review all of the client matters and to make sure we're managing that client confidentiality, authorising them to communicate to all of the clients and the general public on behalf of the firm authorizations in relation to the trust account. Oh my God, do just think about the trust account and the issues with that if we don't have someone authorised and then potentially make the call to actually wind up and ceased trading the firm if that's actually what's needed or to decide is there a key employee who might like to purchase the firm? We need someone who is able to actually put on our big boy or big girl pants and sort all of this out.
(29:14):
We also have specific trigger events that are connected with obviously you as the principal losing capacity or dying or being out of the jurisdiction, but also if you just lose your principal practising certificate for whatever reason because we've got that seven day deadline. So it's kind of hairy when you think about the obligations here and when you start sort of looking through these policies, if you haven't it sorted, you could start getting a bit of a sweat on because it's very serious and there's a lot at stake here with not only your clients but also your staff and anyone whose livelihood depends on you. So the responsible thing to do really is to just get this in place. Now I'm sort of emphasising the worst case. It's actually really simple to do if you invest in our entity Power of attorney precedent pac. Firstly, it's one investment with dual use because not only does it sort out your contingency planning for your firm, but you can also use it over and over again for all of your clients.
(30:18):
So you can add an extra solution to your toolkit and be able to set your clients up for success as well in terms of their business operations. It allows you to walk the talk so you invest in the precedent, you sort it out for yourself. It's super easy to just flow the user notes for, are you running a law firm put in these powers? If it's just for a general client, then you obviously don't include the law firm specific powers and everything's sorted and in place. So it's actually a really straightforward solution. I'm sort of just labouring all the law and principles behind it to give you a sense of the gravity of not doing something. So I do just want to reiterate, the clearest use case is where you are the sole director. It is also relevant where you've got two directors and one of them is overseas or cannot act but has not been disqualified or retired.
(31:21):
So you still need the two directors to sign. Or if you've got a constitution that requires a two directors still and then you go down to a sole director, I really think there's not too many of those old constitutions lying around. But those are sort of the cases where this is most necessary. I really hope that gives you some context. I'll put the link in the user nos for looking at this pack, but it is a really responsible and sensible thing to do to get in place before you head away for Christmas. You'll be able to get on that plane completely worry-free knowing that whatever happens, you've got all of your succession planning in place, not only your personal succession planning, but everything in place for the firm as well. I hope I'm not like giving everyone a heavy vibe before Christmas. It is just responsible to talk about.
(32:17):
And actually one more thing I wanted to say is now's a great time to start talking about this with your clients. Put it in your newsletter, encourage them in your social media to get this done. For anyone who hasn't, basically if they're trading, if they've got employees contracts they signed regularly, you need to have this in just so that you can keep the lights on and all of the routine activities going. So thank you for listening. I hope you've found this really helpful. And if I can just make sure that one law firm owner gets this in place and has a contingency plan sorted, then I'll be thrilled. But hopefully you'll all get it done. We don't need to be the plumbers with the leaky tap and we can walk the talk and also encourage our clients to get it sorted too. Thank you so much for listening.
(33:08):
I will see you next week.
