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. Business owners need 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
- had an accident
- 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? Most people assume that a family member or business colleague can automatically make these decisions on your behalf. Such an assumption could leave your business exposed to risk.
A Lasting Power of Attorney can make the difference between a business continuing or collapsing if the owner loses capacity. Therefore, a business director or a partner should have both a Personal LPA and a Business LPA. It is extremely important for business owners to consider what would happen to their business if they became mentally incapacitated.
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. You will want to choose someone who is both familiar with the business 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. This is 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. There will be nobody with any authority to run the business, 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. You might end up with someone who you would not want to act in your place.
Personal LPAs (i.e. 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. For example, 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. With the correct specialist legal advice it will be relatively straightforward. It is also more cost effective for you to put LPAs in place.
Contact: Natalie Smith, Tax, Trusts and Estate Planning Consultant