Natalie Smith is a freelance Solicitor specialising in Tax, Trusts & Estate/Succession Planning consultancy. Natalie has written this blog for us on the important subject of Lasting Powers of Attorneys for business owners. If there are any questions on Business LPAs, Natalie will be pleased to discuss them by email. Business LPAs are one aspect of Business Continuity Planning which will be the subject of a future blog.
It is a sad reality that many business owners have not made plans for the running of their businesses in the event that they are mentally incapacitated or unable to make decisions. As a business owner, it’s vital to plan for the effects on your business if you were unable to make decisions. This might be if:
• you were abroad on holiday or on business and uncontactable
• you were to have an accident
• you were to have a medical condition that incapacitated you
In such circumstances, who will authorise the payment of bills, sign cheques, service a business loan or pay salaries? It can’t be assumed that a family member or a business colleague will automatically be able to make these decisions on your behalf – such an assumption could leave your business exposed to risk.
A LPA* covering your business can make the difference between a business continuing or collapsing on the incapacity of an owner. Every adult should therefore have both a Personal LPA and a Business LPA if they run a business or are involved in one as a director or a partner. It is extremely important therefore for business owners, partners and directors to consider what would happen to their affairs and, in particular, their business if they became unable to make decisions due to mental incapacity.
The idea behind the LPA is for you to appoint someone (known as your ‘attorney’) who you know and trust to step in, if you suffer an injury or lose capacity to make decisions, at some point in the future. As a business owner, you will want to choose someone to act on your behalf that is both familiar with the business on a day-to-day basis and is commercially astute. If you are a company director, you will also want to review your company’s Articles of Association to see what happens if you or another director were to lose capacity as the LPA and the Articles of Association need to work alongside one another.
For almost all companies, partnerships and LLPs the Mental Health Discrimination Act 2013 creates a situation that can have disastrous results for a business, because if a director or partner loses mental capacity, they cannot be removed as a director (unless so provided in the Articles of Association). Company directors and partners owe a duty of care to the business and any shareholders. Failing to address the situation with a Business LPA could result in negligence claims from those adversely affected.
The Act is even more ferocious for sole trader businesses. A sole trader business will almost certainly close if the trader loses their mental capacity because there will be literally nobody with any authority to run the business or the bank accounts, or to wind it up to sell it! Those dependent on the business are more likely to be the direct family and employees of the sole trader. The most important issue may not be negligence but instead the major consideration is the potential personal devastation that could take place.
If you were to lose capacity without having made a LPA, an application would need to be made to the Court of Protection for someone to be appointed as your deputy. This is a costly and time consuming process and someone who you would not want to act in your place may end up being appointed.
Personal LPAs (ie a Property & Financial Affairs one) can cover business interests too but often different attorneys are appropriate to make decisions on behalf of the business as distinct from someone’s personal affairs. A Business LPA differs from Personal LPAs because they will be tailored to the nature of the business, its Articles of Association and other legal considerations such as partnership or shareholder agreements. These, together with the general aims and interests of the business and any of its directors, partners or shareholders all need to be taken into account when the LPAs are drafted. As such, a separate LPA covering business interests is strongly recommended.
It can be daunting when having to face such complicated legal issues but with the correct specialist legal advice it will be relatively straightforward and more cost effective for you to put LPAs in place.
Natalie M Smith
*A lasting power of attorney (LPA) is a legal document that lets the ‘donor’ appoint one or more people (known as ‘attorneys’) to help the donor make decisions or to make decisions on their behalf. This gives more control over what happens if someone has an accident or an illness and can’t make their own decisions (ie they ‘lack mental capacity’). Someone must be 18 or over and have mental capacity (the ability to make their own decisions) when they make their LPA. They don’t need to live in the UK or be a British citizen to make a LPA.
There are two types of LPA:
• health and welfare
• property and financial affairs (a business LPA is a variant of this one)
All types of LPA must be registered with the Office of the Public Guardian and is only effective once registered. Either the attorneys or the person who has made the LPA (if he or she has mental capacity) can apply to register the LPA. A registered health and welfare LPA does not come into force until such time that the donor has lost the capacity to make decisions. Someone can choose to make one type or both LPAs. There’s a different process in Scotland and Northern Ireland.