Business LPAs - How to safeguard against a future incapacitated partner, director or shareholder?

This article was originally published in Business Matters

16 April 2021

Having spent blood, sweat and tears, not to mention money and time into building a company/partnership, the loss of mental capacity of a shareholder/director/partner could be devastating for a business unless there are the necessary safeguards in place for such individuals.

As a business owner/shareholder, what would happen to your business if you were unable to make decisions – would someone be able to authorise payments or enter into contracts and keep the business running? If not, fundamental business operations may not be possible. This can have adverse consequences for your family finances if they are reliant on income from the business.

Lasting Powers of Attorney (LPA) are a proactive way for sole traders, partnerships shareholders and directors to safeguard and protect their commercial interests for the future. Business continuity is key - what this really means is ensuring you have a valid LPA with a nominated attorney to ensure that your business can keep functioning in the event you lose mental capacity.  And that nominated attorney may not be a family member to whom a personal financial and property affairs  LPA has been granted by the business owner/shareholder as they would not for example have business experience and so a second financial LPA is useful.

Sole trader

If you are a sole trader, this usually means you are the business and the business is you. The loss of capacity means your business is no longer able trade.  What you need an attorney, ideally someone who understands your business to simply steps into your shoes and make business decisions for you and the business so an LPA is essential.

 

Partnerships

Partnerships will be subject to the provisions of any partnership agreement, together with any relevant legislation. Your partnership agreement may already include provision for what would happen should one of the partners becomes incapacitated. If such a provision exists, it may already adequately provide for the continuity of the business, but that should not stop you from having a LPA. 

Whilst it may be possible, in principle, for a partner of a general partnership to delegate his functions as such to an attorney, you will need to consider the nature of the particular partnership and whether it should be inferred that personal performance is one of the partnership obligations.  A power of attorney cannot delegate actions of a personal nature. You should seek advice on the wording of the LPA, to ensure that it does not conflict with the provisions already made in the partnership agreement. 

 

Directors

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. This is often done to protect the company’s interests. If such a provision is not included in the articles of association, you may want to seek advice to consider such a provision. Whilst this protects your business it does not ensure continuity.

A director`s appointment is personal and may only be discharged by the person holding that office and an individual director may not delegate their responsibility to act as a director, by a power of attorney or otherwise. The standard articles do not allow a director to delegate his or her responsibilities, meaning, unless the articles specifically allow a director to delegate his or her responsibilities, that Attorney would not be able to act on a Director’s behalf in that role.

If delegation is permitted then it does post some other issues. 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 not be capable of continuing to carry out those duties.

Therefore, it is unlikely that an LPA will provide much protection - ensuring you have at least two directors is essential to allow for business continuity, but there is no harm in having a LPA nominating an attorney.

 

Shareholders

Whilst an attorney may not be able to act for a director, they could act on behalf of the same individual in 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 present as a decent choice for a business attorney, you should be alert to the potential of a conflict of interest between the attorney’s interests within the business and the business interest held by the donor. It may therefore be wise to look at an independent person, perhaps an accountant or a solicitor who is familiar with your business.

 

If you’re unable to make business decisions in the future, and have not made a LPA, then it is likely your business partners/family members will need 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 more importantly time consuming. It can also take several months before a deputy is appointed, during which time your business may be vulnerable, at risk or worst yet, collapse.

“I won’t need”, “I’ll get round to it at some point” or “the other owners will figure things out” is heard a lot. The absence of a sole trader, a key partner or majority shareholder in a business can have a paralysing effect on a business. Is it worth the risk?

This article was first published in Business Matters (13.04.21) and is available to view online here

FURTHER INFORMATION

If you would like any further information or advice about the topic discussed in this blog, please contact Diva Shah or our Private Client team.

 

ABOUT THE AUTHOR

Diva Shah acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity on a broad range of matters including, 

 

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