Under the DBA Lawyers’ company constitution, a director is empowered to nominate a successor director (SD) to be appointed as a director upon the occurrence of their loss of capacity or death (ie, a ‘trigger event’). Upon a trigger event, the nominated SD is automatically appointed as a director, provided they consent and either hold or have applied for a director identification number.
This article analyses the practical aspects and the relevant law relating to SD provisions in the DBA Lawyers’ constitution.
A typical scenario – a 50/50 company
SD provisions can help address governance and ‘stalemate’ challenges that commonly arise in small companies, eg, companies with only two shareholders and directors. For example, in a ‘mum and dad’ family company where each spouse is in their second relationship, the death or loss of capacity one spouse often results in the other spouse assuming effective control of the company.
In such cases, the incapacitated or deceased director generally cannot be replaced without agreement from the remaining spouse. This is because, under most company constitutions, a majority shareholder vote (ie, more than 50%) is required to appoint a new director, and each spouse only holds 50% of the shares.
Further, these issues are not limited to family companies. SD provisions can also assist in business and investment companies, including companies acting as trustees of family or unit trusts, or for self managed superannuation funds. Thus, in any situation involving two or more shareholders and directors, a constitution with well-drafted SD provisions can provide an essential mechanism for ensuring continuity and control are preserved in trusted hands.
How do successor director provisions assist?
The inclusion of SD provisions provide a method for nominating and appointing an SD to represent an incapacitated or deceased director.
Referring to the above example, if the husband lost capacity or died, he could nominate one of his children from a prior relationship to represent him as his SD. Conversely, if the wife lost capacity or died, she could also nominate a SD to represent her interests. While it is possible to nominate more than one SD, under the DBA Lawyers’ constitution SDs can only exercise the voting power of the nominating director. This acts as an important safeguard to prevent multiple SDs outvoting the existing director(s) of the company.
Further, the majority of shareholders retain the power to hire and fire directors. Therefore, a majority of shareholders can remove an SD who succeeds a director who has lost capacity or died if the majority so decide.
Relevant legislation
The Corporations Act 2001 (Cth) (CA) is silent on a director’s ability to appoint a SD.
The CA provides replaceable rules which can be displaced and modified by a company’s constitution. This includes the replaceable rules in s 201G and 201H, which outline how directors may be appointed. The DBA Lawyers’ constitution expressly displaces these replaceable rules in the CA and outlines its own process for appointing and removing directors.
Companies that do not have the DBA Lawyers’ constitution typically rely on the powers in the constitution or the CA to appoint a director, typically by:
- by resolution passed in general meeting; or
- the directors may also appoint a director and confirm an appointment by resolution within two months.
Under s 140 of the CA, a company’s constitution has the effect as a contract between:
- the company and each member;
- the company and each director and secretary; and
- a member and each other member.
This means that each person agrees to the provisions in the constitution. As a result, the SD provisions are agreed and accepted by each shareholder, and the directors are also bound by these provisions.
In particular, under the DBA Lawyers’ constitution, each shareholder agrees that a director can nominate an SD, who will automatically be appointed in accordance with the SD provisions based on the terms of the relevant SD nomination documentation.
Re Pacific Springs Pty Ltd (2020) 148 ACSR 454
The decision in the case of Re Pacific Springs Pty Ltd (2020) 148 ACSR 454 (Pacific Springs) suggests that an express power to appoint a director must be conferred on a director under the constitution, and appointment under a will without express power in the constitution will not be sufficient. Where there is no express power, any power to appoint a director ceases upon death.
The facts of Pacific Springs are as follows. Dean, the deceased and former sole director of Pacific Springs, had nominated his de facto husband, Ricard, via his Will to be appointed as a director of the company upon his death. The Pacific Springs’ constitution included a provision that empowered a director to ‘at any time … appoint any person to be a director.’ However, the constitution did not specifically refer to the death of a director, nor did it confer a power on a director to appoint another director to take their place upon their death. Therefore, when Dean died, his directorship ceased along with any power to appoint a director. This is the case because ordinarily, ‘the office of director is personal to the director, vacated on the director’s death and cannot be ‘handed down’ as personal property nor exercised by the director’s attorney.’ Importantly though, the honourable Justice Rees, did not rule out the possibility of a constitution containing an express power to appoint a replacement director after death.
While Ricard’s appointment via Dean’s Will was ineffective and subsequently the power to appoint a director rested with the company in general meeting, special circumstances meant the court decided it was just and equitable that Ricard remain as director. Ricard was soon to become majority shareholder and would inevitably have been voted in as director if a meeting was called. He had also been heavily involved in the business as operations manager for some 18 years.
In direct contrast to the Pacific Springs’ constitution, the DBA Lawyers’ constitution provides for an express authorisation for a director to nominate an SD while they hold the office of director, without any need for a general meeting or resolution of shareholders or directors.
Attorneys seeking to appoint directors
Mancini v Mancini (1999) 17 ACLC 1570 (Mancini) is referenced in Pacific Springs as authority that the office of director is a personal responsibility only dischargeable by its holder. However, the court held that any exception to this proposition must be found in the constitution of the company. The judgement distinguishes between the office of a director, which is not a proprietary right and cannot generally be exercised by a delegate or attorney, and shareholder rights, which are property rights. This reiterates that a director cannot appoint someone to act in their place unless expressly provided for in the constitution.
The Mancini decision was relied on in Saad v Doumeny Holding Pty Ltd [2005] NSWSC 893 (Saad). Here a director had the power to appoint another director if necessary to reach a quorum under the constitution. Upon losing capacity, the director’s attorney, acting under their power of attorney, attempted to exercise this right. However, this exercise of power was invalid as the performance of a director’s office is a director’s own personal responsibility and it cannot be delegated to another.
These cases also support the proposition that, without an express power in the constitution, the appointment of SDs by instruments such as a will or power of attorney are ineffectual when utilised after the loss of capacity of the appointing director.
In contrast, the DBA Lawyers’ constitution includes express power for a director, while they are alive and have capacity, to nominate a SD who will be automatically appointed upon a trigger event.
Is there any merit in considering an alternate director?
The role of an alternate director (including when combined with an enduring power of attorney) can be problematic from a succession planning perspective. While an alternate director can step in for a director for a specified period or on a temporary basis, they still derive the source of their power from the appointing director. Therefore, once that appointing director ceases to hold office (eg through loss of capacity or death), an alternate director loses the ability to exercise director powers. Therefore, while alternate directors may be useful in certain short-term situations where a director is temporarily unavailable provided the appointing director has capacity, they are not a robust solution in the context of incapacity or death — scenarios that SD provisions are specifically designed to address.
The DBA Lawyers’ constitution nevertheless contains express alternate director powers. Note that s 201K of the CA is a replaceable rule regarding alternate directors (which is displaced under our constitution).
We provide links to two detailed articles below on alternate directors.
Conclusions
DBA Lawyers’ company constitution provides, among numerous other value-added advantages, enhanced succession planning from a company perspective. We recommend that clients consider making SD appointments while they have capacity to ensure smooth corporate succession, address potential governance risks and create greater certainty.
Naturally, we would be pleased to assist and provide advice or documentation that may be required.
Related articles:
- Advantages of a DBA Lawyers company
- Preserve the intended control of a company using successor directors
- Is an alternate director for an SMSF better than a successor director? Part 1
- Is an alternate director for an SMSF better than a successor director? Part 2
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler ([email protected]), Director, Bryce Figot ([email protected]), Special Counsel, William Fettes ([email protected]), Director and Cassandra Hurley ([email protected]), Lawyer.
DBA LAWYERS
29 May 2025
