Business Lasting Powers of Attorney
Stress and occasional sleepless nights may be an inevitable part of running a business, but there is one area where some forward planning can put your mind at rest. What will happen to your business if illness or incapacity makes you unavailable? A business Lasting Power of Attorney will mean that your chosen attorney can make decisions and keep the business running. Without this arrangement in place, a business may struggle to operate and its existence may even be threatened. Issues like paying staff and suppliers, entering into contracts and finishing transactions may not be possible.
What is a business Lasting Power of Attorney?
A business Lasting Power of Attorney allows the donor to appoint an attorney to make decisions concerning their business interests either when they are unavailable or lack mental capacity. A business Lasting Power of Attorney should be distinguished from a Property and Financial Affairs Lasting Powers of Attorney, which are created to manage an individual’s personal finances.
Powers of Attorney are already widely used by businesses to manage a range of commercial situations. Business Lasting Powers of Attorney should be seen as an extension of managing business interests, as part of the business crisis management practice and reducing business risk.
It is important to distinguish general Powers of Attorney, which are generally temporary in nature, from business Lasting Powers of Attorney which can continue until death of the donor.
A business may be at risk if it does not have a business Lasting Power of Attorney in place as part of its crisis management strategy. It may also affect insurance costs and future claims.
Why make a separate business Lasting Power of Attorney?
If an individual loses capacity and has not executed a valid enduring or lasting power of attorney, an application to the Court of Protection seeking the appointment of a deputy may be required. Applications to the Court of Protection take a minimum of four months, and very often very much longer depending on the complexity of the information that must be provided to the Court of Protection. During this time, there would be no one who could lawfully make financial decisions on that person’s behalf and bank accounts may be frozen until the deputy is appointed. This occasionally happens with personal finances and is more likely to occur with business matters.
This situation may be problematic for someone with business interests who is unavailable or lacks mental capacity. Without a business Lasting Power of Attorney it may not be possible to pay staff and suppliers, complete unfinished transactions, or enter into new contracts. This is likely significantly to impede the day-to-day running of the business and, in some cases, may threaten its existence.
Even where bank accounts are jointly held in the names of business partners or directors, the bank may choose to freeze the account if a partner or director loses capacity to deal with their financial affairs. Following such an event the business becomes exposed to failure or winding up.
Having a business Lasting Power of Attorney in place, the business owner may ensure someone they trust and who understands their particular business will be able to continue the day-to-day running of the business. Attorneys are able to deal with property owned or leased by the business, organise insurance, access bank statements and accounts, invest assets, deal with the tax affairs of the business, pay staff and suppliers and sign contracts.
In many instances, it will not be appropriate for the same person to make both personal financial decisions and business decisions on behalf of the donor. Commercial legislation and practices, financial regulatory bodies, conflicts of interest, the partnership agreement or articles of association may prevent such an appointment. Where this is the case, it is important that a business owner considers making a separate business Lasting Power of Attorney.
Choice of Attorney
It is important that the attorney(s) under a business Lasting Power of Attorney is familiar with the business concerned and is someone whom the donor trusts with his business affairs. Where the donor wishes to appoint more than one attorney, they will need to decide how the attorney(s) are to act — i.e. jointly, jointly and severally or jointly for some decisions and jointly and severally for others.
An attorney who takes on the management of a donor’s business interests without the requisite competency, understanding or skills, may find themselves subject to a claim against them due to their unsuitability to act as an attorney.
Who is eligible to make a business Lasting Power of Attorney?
Sole traders frequently run specialist or technical businesses. The business does not have its own legal personality or separation from the business owner. A sole trader who does not make provision for when they are unwell, away on holiday, off on longer term sick leave or lack mental capacity, exposes their business to an unnecessary risk.
Partners (general partnerships and limited partnerships)
There are effectively two types of partnership governed by either the Partnership Act 1890 or the Limited Partnerships Act 1907. Partners should consult their partnership agreement as this may contain provisions relating to the incapacity of the partners. Such provisions removing partners who lack mental capacity may be in breach of the Equality Act 2010. In order to manage a potential situation with a partner who lacks mental capacity and to reduce the risk of discrimination, the partners should each consider putting in place a business Lasting Power of Attorney. They could, of course, consider appointing attorneys from amongst themselves.
Partners (Limited Liability Partnerships)
Limited liability partnerships (LLPs) are governed by the Limited Liability Partnerships Act 2000. This means that some or all of the partners or members limit their liabilities. In practice this means one member may not be responsible or liable for another member’s misconduct or negligence. LLPs are subject to many of the provisions under the Companies Act 2006. LLPs frequently adopt as their partnership agreement the Companies Act Model Articles. The LLP’s articles, as with partnership agreements, would need to be considered to remove any offending or potentially discriminatory clauses where a claim for discrimination may arise. As with partnerships, LLP members may wish to appoint either themselves or independent third parties as their attorneys.
The law relating to the removal of a director who lacks mental capacity changed in April 2013. Prior to this date, if a director lacked mental capacity the other directors could seek a court order to remove them but this is no longer possible. The Mental Health (Discrimination) Act 2013 was introduced partly to remove the stigma of mental health.
Shareholders may consider removing a director lacking mental capacity by calling a shareholders’ meeting to remove them. Using this procedure, the director needs to be served special notice and given the opportunity to defend themselves. If they lacked mental capacity they would not be in a position to receive notice or to suitably defend themselves. In such circumstances, shareholders may be best advised to make an application to the Court of Protection for representation to be made on their behalf.
Companies with articles which include provisions requiring a director to relinquish their directorship without regard for the provisions of the equality legislation may find themselves subject to discrimination claims.
Companies sometimes claim that individual directors are unable to authorise a proxy or to delegate their individual authority, and the law relating to this is complex and beyond the scope of this note, but the highest authority in the COP, Senior Judge Lush, himself commented that there are ‘Cases where the donor should have made two LPAs: one for their business affairs and the other for their personal finances’.
To protect the company’s interests and avoid discrimination claims and regularity investigations, a business Lasting Power of Attorney should ideally be created by all directors.