The loss of mental capacity of a director, partner or shareholder could be devastating for a business unless there are the necessary safeguards in place.
Just consider: what would happen if a business owner or majority shareholder was unable to make critical decisions – would someone be able to authorise payments, enter into contracts and keep the business running? If not, fundamental business operations may not be possible.
Lasting Powers of Attorney (LPAs) are a proactive way for sole traders, partnerships, shareholders and directors to protect their commercial interests for the future and ensure business continuity. They work by delegating powers to a nominated attorney in the event that an individual loses mental capacity. For personal financial affairs that nominated attorney is often a family member. However a second LPA is often useful where a business may be affected so that the business owner/ shareholder grants powers to someone with the right business skills, acumen and experience.
For sole traders, the loss of capacity would mean a business is no longer able trade and there could be severe financial implications for family members relying on that income stream. Here an LPA is essential so that an attorney, ideally someone who understands the business, can simply step in and take over the reins.
Partners should check if their partnership agreement already includes provision for what would happen should one of the partners become incapacitated. If such a provision exists, it may already adequately protect business continuity, but doesn’t necessarily obviate the need for a LPA. However advice on the wording of the LPA should be taken to ensure that it does not conflict with the provisions of the partnership agreement.
Directors and capacity are a tricky area and much is dependent on the company’s articles of association and to some extent the interpretation of the legislation. Very often, articles of association of a company will provide for the termination of a director’s appointment in the event that the director loses mental capacity.
Also standard articles do not allow a director to delegate his or her responsibilities via a power of attorney, but it is worth checking if delegation of powers is permitted.
If yes then other issues also need to be considered. The donor director, continuing in office, would continue to have the duties (and the associated liability) of a director under the Companies Act 2006 and at common law. An incapacitated director would clearly not be capable of continuing to carry out those duties.
Therefore, it is unlikely that an LPA will provide much protection. On the other hand, having an LPA and a nominated attorney can be helpful in ensuring there are at least two directors for business continuity, so for this reason there may be no harm in having a LPA in place.
Whilst an attorney may not be able to act for a director, they could act on behalf of the same individual if they were also a shareholder. Shareholder business owners carry a lot of responsibility on their shoulders and their involvement is required to make certain key decisions. A LPA is particularly important for a sole or majority shareholder to ensure resolutions are capable of being passed. The provisions of any shareholder’s agreement should be checked to ensure that any conflicts are addressed before granting/making provisions in the LPA.
Whilst a fellow director or partner may seem a decent choice for a business attorney, the potential for conflict of interest between the attorney’s interests within the business and the business interest held by the donor should be considered. It may, in fact, be wise to look at an independent person, perhaps an accountant or a solicitor who is familiar with the business, when deciding who to nominate as an attorney.
Where business owners, directors or shareholders have no LPA in place and mental incapacity occurs, business partners/family members can make an application to the Court of Protection for the appointment of a deputy to act on the individual’s behalf. However the process can be expensive and more importantly time consuming. It can take several months, for example, before a deputy is appointed, during which time the business may be vulnerable, at risk or at worst, collapse.
Those running businesses or with shareholder or partnership responsibilities should therefore consider the merits of LPAs carefully. “I won’t need”, “I’ll get round to it at some point” or “the other owners will figure things out” are phrases we hear a lot. LPAs offer extra protection and can help minimise business risk.
The author is Diva Shah, an Associate in the Private Client team at Kingsley Napley LLP