What Happens to a Company When a Director or Shareholder Dies?

Directorship and Share Ownership Are Different

The single most important point is also the most overlooked: being a director and being a shareholder are two different roles. A director manages the company. The role is personal — it is held by the individual, not transmissible, and ends automatically on death. A shareholder owns shares, which are a form of property. The shares pass through the deceased's estate like any other asset.

In a family or small company, the same person is usually both. When they die, the two threads have to be untangled. The directorship question is: who runs the company now? The shareholding question is: who owns the shares now, and how do those shares become available for transfer, sale or distribution under the will?

What Happens to the Director's Role on Death

Directorship ends on death by operation of law. There is no need for the company to formally remove the deceased — the office is simply vacated. The company must, however, notify ASIC of the cessation, normally within 28 days, using a Form 484. Failing to lodge the form attracts late fees and (where the company secretary or remaining officers are the ones at fault) can attract personal penalties.

If there are surviving directors, the board continues with the remaining members, subject to any quorum requirements in the constitution. If the deceased was the only director, the company has no one with the legal authority to act — sign cheques, deal with the bank, pay employees, engage suppliers, instruct accountants or lodge BAS — and the situation must be regularised urgently.

What Happens to the Shares on Death

Shares are property. On death they pass to the deceased's legal personal representative — the executor named in the will, or the administrator appointed under letters of administration where there is no will. The shareholding stays on the company's register in the deceased's name until the executor produces a grant of probate or letters of administration and asks the company to register the shares in the executor's name. That process is called transmission of shares.

Transmission is not a sale or a transfer. No price is paid, no stamp duty (in most cases) is payable, and the company does not become free to refuse it simply because the directors do not like the executor. The directors have a narrow power under most constitutions to refuse registration of a transferee, but a transmission to the legal personal representative is in a different category — refusal is harder and usually unwise. Once the executor is registered, they hold the shares as the legal owner for the estate and can deal with them in accordance with the will and any constraints in the constitution or shareholders agreement.

ASIC Records and the Company Register

Two records are affected when a director or shareholder dies:

• ASIC records — director and officer changes must be notified within 28 days via a Form 484. Member changes are recorded with ASIC only for public companies and the top 20 members of certain proprietary companies; for most family companies, member changes are recorded only on the internal company register.
• The company's own register — every company must maintain a register of members and a register of directors. Both must be updated promptly to reflect the death, the transmission of shares to the executor, and any later transfer or appointment.

The company secretary, accountant or external corporate services provider usually handles the lodgements, but the duty rests with the company — meaning, in practice, the surviving directors or the executor where a section 201F appointment has been made.

Sole Director and Sole Shareholder Companies

A single director / single shareholder proprietary company is the highest-risk structure when its sole principal dies. On the moment of death:

• the company has no director;
• the company has no functioning shareholder vote, because the only shareholder's executor is not registered yet;
• the bank, on being notified of the death, will usually freeze the company's accounts;
• employees, suppliers, the ATO and (often) a landlord still expect to be paid; and
• contracts with key counterparties may contain change-of-control or insolvency-style termination clauses.

The legal mechanism that resolves this is section 201F of the Corporations Act. Section 201F allows the legal personal representative of the last surviving member of a single director / single shareholder company to appoint a person — including themselves — as the director of the company. The appointment requires a grant of probate (or letters of administration), is made in writing and is notified to ASIC. Until that appointment is made, the company is effectively paralysed.

Because the gap between the date of death and the date of the grant can be weeks or months, sensible planning for any sole director / sole shareholder company includes a second director (often a spouse or trusted adviser), an EPOA-style mandate with the bank, and a will that specifically addresses the company.

Replacement Directors in Multi-Director Companies

In a company with more than one director, the surviving directors normally continue. New directors can be appointed under the procedures in the constitution — commonly by board resolution (to fill a casual vacancy), subject to shareholder ratification at the next general meeting, or by direct shareholder vote. The deceased's executor cannot vote those shares until transmission has occurred. In family companies, this timing issue can shift control unexpectedly to surviving co-owners; legal advice is often needed in the first month after death.

Executor Powers Over the Company

The executor's powers come from the will and from general succession law — not from the company's constitution. Once registered as the holder of the shares, the executor can:

• vote the shares at general meetings (subject to any constitutional restrictions on transmission holders);
• receive dividends and other distributions;
• transfer the shares to a beneficiary in accordance with the will;
• sell the shares (subject to pre-emption rights or buy/sell terms);
• negotiate with surviving shareholders about a buy-out, restructure or sale of the business; and
• where the constitution and section 201F allow, appoint a director.

The executor cannot, simply by being the executor, walk into the company's office and start running it. The company is a separate legal entity. Operating control requires a board appointment.

The Company Constitution

The constitution is the first document an executor should read. Typical clauses that matter on death include:

• recognition of the legal personal representative as the holder of the deceased's shares;
• the right (or restriction on the right) of directors to refuse to register a transferee of shares;
• pre-emption rights — requiring shares to be offered to existing shareholders before any outside transfer;
• compulsory transfer ('drag-along') and tag-along provisions on the death of a key shareholder;
• procedures for the appointment of directors and for filling casual vacancies; and
• quorum rules for board and general meetings.

Where there is no constitution, the replaceable rules in the Corporations Act apply by default. The replaceable rules are usually adequate for a single-owner company but rarely produce the outcome a family expects in a multi-owner business.

Shareholders Agreements

A shareholders agreement is a contract between the shareholders that sits on top of the constitution. Well-drafted agreements deal explicitly with death and incapacity — typically requiring the deceased's shares to be offered to surviving shareholders at a defined price (or by a defined valuation method), often funded by insurance, and binding the executor to participate. Where a shareholders agreement exists, its mechanism usually controls.

Buy/Sell Agreements

A buy/sell agreement is a specific type of arrangement under which the death (or total and permanent disability) of a shareholder triggers a compulsory sale of their shares to the surviving shareholders or back to the company, usually funded by insurance held on each shareholder's life. A properly drafted and funded buy/sell agreement gives the estate a clean exit at a known price and gives the surviving owners certainty about control. Without one, executors and survivors often end up arguing for years about valuation, timing, financing and who is in charge in the meantime. See our companion article on buy/sell agreements for the detail.

Business Succession Planning

Most of the worst outcomes on the death of a director or shareholder are caused not by the death itself but by the absence of a current business succession plan. Succession planning in this context covers the structure (who holds shares, how, and through what vehicle), the governance (constitution, shareholders agreement, board composition), the funding (insurance, buy/sell, working capital reserve), and the integration with the personal estate plan (the will, testamentary trusts, EPOAs and superannuation). See our broader article on business succession planning.

Estate Administration Issues

From the estate side, the executor's duties include:

• locating and securing the share certificates and the company's records;
• obtaining a grant of probate or letters of administration;
• identifying any shareholders agreement, buy/sell agreement and constitution;
• arranging transmission of the shares;
• arranging valuation for estate and tax purposes;
• protecting the value of the shares pending distribution;
• finalising the company's tax and reporting obligations to the extent they affect the estate; and
• keeping beneficiaries informed.

These sit alongside the executor's general duties under the duties of an executor and the steps required to obtain probate in Victoria (or letters of administration where there is no will).

Control of Bank Accounts and Business Operations

Banks notified of a death will almost always freeze company accounts where the deceased was the sole signatory, the sole director, or both. Reactivation usually requires a death certificate, the constitution, evidence of any new director appointment (under section 201F or otherwise), and identification of the new signatories. In the gap, payroll, supplier payments and statutory obligations still fall due — and personal director penalties can attach to a newly-appointed director who allows PAYG or superannuation to fall behind. The first priority in the first week is usually to open communication with the bank and to make sure wages and critical supplier obligations are met.

Tax and Accounting at a High Level

The death of a director or shareholder triggers several tax and accounting threads:

• the deceased's final personal tax return;
• the company's ongoing BAS, PAYG, payroll tax and company tax obligations;
• CGT treatment of any later transfer of shares from the executor to beneficiaries (often a roll-over with cost-base inheritance, but specific advice is required);
• Division 7A treatment of any loans between the deceased and the company;
• superannuation death benefits where the company is the employer or a sponsor of a self-managed fund;
• stamp duty on any subsequent transfer of shares to beneficiaries or to surviving shareholders (state-specific); and
• valuation of the shares for estate, family provision and (where relevant) duty purposes.

Accountants and lawyers should coordinate from the start — the accounting decisions and the legal decisions are interconnected and the worst outcomes usually come from handling them sequentially rather than together. If the company holds personal property or has registered security interests, see also our note on the Personal Property Securities Register.

Disputes Between Executors, Beneficiaries, Directors and Shareholders

The most common disputes that arise on the death of a company director or shareholder are:

• between executors and surviving directors over operational control of the company;
• between executors and surviving shareholders over the price, timing or mechanics of a compulsory transfer under the constitution or a shareholders agreement;
• between co-executors who disagree about whether to run, sell or wind up the business;
• between beneficiaries who want to keep the shares and beneficiaries who want to be paid out in cash;
• between minority and majority shareholders where post-death decisions are perceived to be oppressive (sections 232 to 234 of the Corporations Act); and
• between the estate and family members who feel excluded from the business — sometimes spilling into family provision proceedings.

Most of these disputes are predictable and many are avoidable with a current shareholders agreement, a funded buy/sell, a current valuation and a will that explicitly addresses the business. Where a dispute has already started, early legal advice — and, where possible, early mediation — almost always shortens it. Beneficiaries who are concerned about how the executor is dealing with company shares should read our note on beneficiary rights during estate administration.

When Urgent Legal Advice Is Needed

Urgent legal advice is needed in any of the following situations:

• the deceased was a sole director / sole shareholder;
• company bank accounts have been frozen and wages are due;
• the constitution or a shareholders agreement triggers a compulsory sale or pre-emption process on death;
• there is a buy/sell agreement with insurance funding to be claimed;
• the company holds operating assets, licences or premises that require continuity;
• surviving shareholders or directors are taking steps the executor disagrees with;
• there is an existing or threatened dispute among beneficiaries; or
• the estate itself is being challenged.

See also our overview of what happens to a business when an owner dies, which covers sole trader, partnership and company structures at a higher level.

How Parke Lawyers Can Help

We act for executors, surviving directors, shareholders and beneficiaries across Australia where the death of a company principal creates immediate operational and estate issues. That work spans urgent advice on section 201F appointments and bank dealings, transmission of shares, review of the constitution and shareholders agreement, buy/sell implementation, valuation and negotiation, ASIC compliance, and resolution of disputes between executors, beneficiaries and surviving owners. Our services in these areas include probate and estate administration, commercial and business law, wills and estate planning and estate litigation and TFM claims.

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