Business Lasting power of attorney
A lasting power of attorney is a legal document that allows you (the donor) to appoint representatives (attorneys) to make decisions on your behalf when you are unable to.
There are two types of LPA’s
- Property and Financial Affairs; and
- Health and Welfare LPA.
In order for your attorney to use the LPAs, the LPAs must be registered with the Office of the Public Guardian (OPG). Please refer to the section on LPAs for further information detailing the above type of LPAs.
When it comes to your property & financial matters, it is possible for you as the donor to separate your personal property & financial affairs from your business affairs.
There are numerous reasons why it would be advantageous to consider registering separate business lasting power of attorney. If you have a business and your family have not been a part of this business and are not aware of how to manage the business in your absence (when you can no longer manage) any lack of understanding on how to maintain the business could have adverse financial implications. This could have a ripple effect on you, your needs and that of your family. Having an LPA in place does not mean that you must be mentally incapacitated for your attorneys to act. You can appoint your business attorneys to act if you were abroad and needed to liquidate an asset or conclude a transaction. In such circumstances, who will authorise the payment of bills, sign cheques, service a business loan or pay salaries? Don’t assume that a family member or a business colleague will gain the authority to make these decisions on your behalf – this assumption could leave your business exposed to risk.
To protect your interests, and those of your business, you should consider making a business LPA.
Sole trader
As a sole trader your business is an intrinsic part of you. This means that appointing an attorney under a business LPA will be an effective way for you to make provision for the continuity of your business, in the unfortunate event of you becoming incapacitated.
Partnerships
Ideally if you are a partner in a partnership, it is sensible to have a partnership agreement in place. In saying that large number of partnerships do not have agreements in place and there are those who may have partnership agreements in place but fail to take into account mental incapacitation. It would be advisable to review your partnership agreement to check the terms of the agreement. Some partnership agreements may already include provision for what would happen should one of the partners become incapacitated. If such a provision exists, it may already adequately provide for the continuity of the business, in which case, a business LPA wouldn’t be necessary.
However, if you’re in doubt about the provision made in the partnership agreement, or you feel that an LPA may be required, you should seek advice on the wording of the LPA, to ensure that it doesn’t conflict with the provisions already made in the partnership agreement.
Directors of companies: articles of association
Once again, if you are a director in a company, it is sensible to have articles of association in place to deal with specific events. In saying that large number of companies fail to take into account mental incapacitation. Very often, articles of association provide for what would happen on death or retirement. Some articles include incapacity and will provide for the termination of a director’s appointment in the event that the director loses capacity. This is often done to protect the company’s interests. The Mental Capacity Act 2005 has changed the way in which an incapacitated director is treated on incapacity.
A director is a company officer and also an employee of the company. As directorship is a personal office, it cannot be delegated to an attorney. Hence, even a validly executed and registered LPA does not give the attorney the power to step into the shoes of the director, either as an officer or as an employee.
What happens when a director loses capacity?
The articles of association should address this point. If a company is using bespoke Articles or model articles under earlier legislation, the situation needs to be considered by reference to the appropriate version of the Articles.
Art 18 of the model articles states:
“A person ceases to be a director as soon as—
(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”
A written diagnosis by a treating doctor that the director is physically or mentally incapable to continue in the role for more than three months would mean that the directorship automatically terminates. No agreement of the other directors (as to the termination or as to whether the person in question in fact lacks mental capacity) is needed. The company should prepare a board minute recording the termination and the company secretary should file the requisite form with Companies House to remove the director’s name from the record.
There are however cases where the incapacitated director prevents any board meeting being quorate (so that a record of the termination of the office cannot be made internally and external records accordingly cannot be updated). This makes it very difficult for the company continue to operate without its director.
Under Art. 11 a board meeting that is not quorate can still appoint a new director or can call a general meeting so that shareholders can appoint a director. The meeting must be at the instigation of the board of directors. Accordingly, if there are no directors to call a general meeting, shareholders will need to apply under section 306 Companies Act 2006 for an order that a meeting be held at which resolutions are proposed to appoint directors or change the Articles. If the incapacitated sole director was the sole shareholder of the company, the power to make section 306 application will vest with the director’s attorney or deputy if one has been appointed. If none has been appointed, an application to the Court of Protection will be necessary to appoint a deputy.
The directors, if quorate, can normally terminate the incapacitated director’s contract of employment. This need not vacate the office of director, however withdrawing the reward for director’s efforts may lead to the desired outcome. What happens when directors are not able to act (e.g. they are not quorate)? Art. 7 allows the company to appoint additional directors by ordinary resolution. The company may therefore gather the necessary quorum to terminate the incapacitated director’s contract of employment. If the board is completely unable or unwilling to act, Art. 4 allows shareholders to direct the board by a special resolution to take a specific action (e.g. terminate the incapacitated director’s contract of employment).
Shareholders always have the option of removing a director from office by ordinary resolution at a shareholders meeting under section 168 Companies Act 2006. Meeting must be called following special notice procedures and the director in question may speak at the meeting in his defence.
The termination of the director’s employment contract will not automatically lead to removal of the director from his position as an officer of the company. However, removal of the director from the position of an officer of the company will automatically terminate his/her employment contract. The automatic termination of employment does not strip the director of his or her right to claim compensation for breaches of employment rights or his/her entitlement to contractual payments arising out of his termination of employment. The contract of employment should therefore always be consulted prior to any action.
If you are the sole director of a small private company, the articles of association are not likely to simply terminate the director’s appointment, or there would be no one else to continue running the company. In such circumstances, a business LPA would be appropriate.
Can an LPA cover both personal and business affairs?
It is possible to have just the one LPA appointing attorneys to manage your personal assets and your business assets. You must first consider whether this could lead to a potential conflict of interest. You could consider making an LPA appointing certain attorneys to manage your personal assets, and others to manage your business assets. This could however create confusion regarding the scope of the attorneys’ powers, and the Office of the Public Guardian is likely to reject the LPA.
Fortunately, it’s possible to make more than one LPA. You could consider making one for your personal affairs and a separate one for your business affairs. Often, people like to keep their business affairs separate from their personal affairs, so this option tends to appeal.
If you are making two LPAs, each should contain specific instructions limiting the scope of the attorneys’ powers – for example, a personal LPA should specify that your attorney will have general power in relation to your personal affairs, except for the relevant business assets in respect of which you have executed a separate business LPA. Your business LPA should contain specific instructions in this respect, too. Your attorneys will then be clear about their powers and will not encroach on each other’s responsibilities and decisions.
Failing to make a business LPA?
If you’re unable to make business decisions in the future, and have not made a business LPA, it may become necessary to make an application to the Court of Protection for the appointment of a deputy to act on your behalf. The process can be expensive, and there’s no guarantee that the Court of Protection will choose someone you would have chosen. It could also take more than six months before a deputy is appointed, during which time your business may be vulnerable and at risk.
To avoid disruption, it should be part of any business owner’s continuity plan and crisis management strategy to consider making a business LPA.
To summarise
Abusiness lasting powers of attorney (LPAs) allow the donor (the business owner) to appoint a suitable attorney to make decisions concerning their business interests when they are unavailable or lack mental capacity.
If there is no business LPA in place, certain risks arise. An example, if one of the bank account signatories lacks capacity the bank can freeze the account to protect the now vulnerable adult. If there is an overdraft, the possibility of the bank freezing the account is greater. With solicitors or other regulated professions as business owners, if they lack capacity there could be professional implications resulting in their regulatory body intervening. Contracts entered into by a person who had capacity but now lacks it may become unenforceable owing to their incapacity. Paying creditors, employees or tax becomes difficult as does running the business generally with a businessperson who now lacks capacity. Investors may require their investments to be returned. Appointing a business LPA attorney prevents these issues from arising.
If there is no business LPA in place an application should be made to the Court of Protection to have a deputy appointed. This may take months or longer, during which time the business is exposed to uncertainty of survival.