Eleanore Hiralall | Attorney : Legal Services Division
DON’T LET YOUR BUSINESS DIE UPON YOUR DEMISE:
DEATH OF A TRUSTEE/DIRECTOR/MEMBER/ AND THE IMPACT ON BUSINESS CONTINUITY
The objective of Succession Planning is not only to secure future leaders in an Organisation but importantly to ensure continuity of business operations.
When looking at the most common business structures we have in South Africa (Companies / Close Corporations / Trusts and the like) it is of fundamental importance to ensure that upon your demise your business is able to continue to operate and function as normal in your absence unless it is your specific wish for business operations to cease upon your death.
Like with any business or organizational structure, having a founding document or “rule book” (ie. Memorandum of Incorporation (“MOI”)/ Association Agreement / Trust Deed etc.) is of utmost importance in ensuring that there are sufficient regulated provisions that direct the continuity of the business.
Trusts: Death of a Trustee and the impact thereof
- When establishing a Trust it is vital to appoint suitable trustees to attend to the administration of the Trust, which is ultimately for the benefit of your beneficiaries (ie. those persons for whom the trust was created).
- Trustees have a fiduciary obligation to the beneficiaries and need to be au fait with the provisions of the Trust instrument ie. the Trust Deed (“the rule book”).
- Having suitable provisions in your Trust instrument is therefore crucial. The Founder (person that establishes the trust) plays a pivotal role in setting out the “rules” or powers entrusted to the Trustees during their term of office, including the power to appoint additional trustees upon the death/resignation of a trustee.
- Often when a Trustee dies or resigns from office, the other Trustees are not aware of the necessary procedures on how to get a trustee removed or replaced.
- When a Trustee resigns or dies, the Letter of Authority must be returned to the Master together with certain documentation as highlighted hereunder, in order for the Master to attend to the removal of such trustee:
- Death of a Trustee: the death certificate must be sent
- Resignation of a Trust: Letter of Resignation from the trustee resigning and Resolution from the remaining trustees accepting the resignation
- If it is a requirement for a replacement trustee to be appointed, the remaining trustees must actively ensure that a new trustee is identified and steps are taken for the Master to give effect to such appointment for a new Letter of Authority to be issued.
- Some trusts stipulate there must be a minimum number of trustees in office.
- Failure to adhere to the stipulations in the deed where the number of trustees fall below that minimum number means that the trust is non-compliant with its very own provisions with the remaining trustees lacking the required capacity to transact until such time that the minimum number is restored.
- A new Letter of Authority is required reflecting the new trustee/s in order for the trust to continue to transact.
What happens if my Trust only has one Trustee?
- The difficulty comes in when a trust has a single trustee and/or there are no contingencies in place in the Trust Deed to regulate the appointment of additional trustees.
- When a trustee dies another trustee is to be appointed to ensure the continuity of the trust as a trust cannot operate without any appointed Trustees.
- In instances where the Trust Deed does not regulate suitable provisions on the appointment of additional trustees, the Trust Property Control Act 57 of 1988 at Section 7 (1) (Appointment of trustee and co-trustee by Master) stipulates that:
“If the office of trustee cannot be filled or becomes vacant, the Master shall, in the absence of any provision in the trust instrument, after consultation with so many interested parties as he may deem necessary, appoint any person as trustee.”
- The Master of the High Court therefore has the authority to appoint further trustees.
Way Forward for Trusts
- Ensure that your Trust Deed has sufficient succession planning provisions in place to allow for the appointment of additional trustees upon death / resignation of a trustee.
- Failure to regulate suitable provisions in the Trust Deed will mean that your Trust will be faced with serious cost implications in seeking legal relief to appoint additional trustees.
- Should you fail to nominate suitable replacement trustees in your trust instrument, a directive made by the Master of the High Court can result in persons whom you would not have ordinarily chosen to be trustees, to be appointed to manage and administer the trust as Trustee.
- Become fully acquainted with the provisions of your Trust Deed to avoid unnecessary hurdles or complications when a trustee dies or resigns, which may impact the continuity of operations.
Companies and Close Corporations: Death of a Director / Member and the impact thereof
- Similar to Trusts having a Trust Deed, juristic entities also have founding documentation in place to govern the day-to-day business operations, management and control of the business.
- In most instances the founding documentation would dictate what would happen in the event of death of a Director / Member. In the absence thereof, applicable legislation will be relied upon to understand what would happen in the event of death of a Director /Member.
What happens if my Company / Close Corporation only has one Director / Member?
- Juristic entities such as Companies and Close Corporations are governed by Legislation such as the Companies Act 71 of 2008 and the Close Corporations Act 69 of 1984.
- When dealing with juristic entities that comprise of a single Director who also happens to be the sole Shareholder / sole Member, the juristic entity becomes incapacitated until an Executor of the deceased Director / Member is appointed who shall then step into the shoes of the deceased Director/Member (unless the founding documentation specifies otherwise).
- The appointment of an Executor can be a time-consuming process especially if the deceased Director/Member left no Will and there are disagreements amongst the deceased’s family as to whom can fulfil the critical role of Executor.
- Not having sufficient mechanisms in place from a succession planning point of view in your founding document means that the business is incapacitated, ultimately prejudicing business continuity and operations which may also directly impact your employees and service providers as salaries and other daily expenses cannot be paid.
Way Forward for Companies / Close Corporations
- When deciding to establish a juristic entity seek legal assistance to ensure that your founding document (ie. MOI / Association Agreement) has suitable succession planning provisions in place to provide for the immediate appointment of replacement Directors /Members.
- Failure to regulate suitable provisions in the founding documentation can have dire consequences for your business especially in instances where such businesses are managed/operated by single owned Directors / Members.
Should you have any uncertainties regarding what is contained in the founding documentation of your Trust or juristic entity or wish to amend your founding documentation to cater for succession planning on your demise, please consult with an Attorney for assistance.