Lasting powers of attorney for business owners
Everyone should consider how their financial affairs will be dealt with in the event of their incapacity, and, as everyone has been reminded over the past year, old age is not the only cause of incapacity; accidents and devastating illness are also possibilities that should be borne in mind.
The need to plan for such eventualities is particularly important in the case of business owners. Without a lasting power of attorney (LPA) your business could face possible paralysis if you become incapable and an LPA should be regarded as an essential part of risk management to avoid a possible future crisis.
The first steps: consider the type of business
If you have decided to protect your business by drawing up a business LPA you first need to consider the type of business entity through which you operate.
If you are a sole trader, you will have no partners nor co-directors who can carry on your role. It is therefore vital that a sole trader draws up an LPA. This means that in the event of incapacity, someone both trusted and competent can run the business, pay its bills and control the business bank account. If no provision is made, the future of the business could be threatened due to an inability to operate, and staff and suppliers might not be paid. If required, a registered LPA could also be used during periods of temporary absence when you are unable to deal personally with the business’s affairs, perhaps if you are away in a remote country.
If you are a partner, the partnership agreement should be examined. This may provide for compulsory retirement from the partnership in the event of incapacity, although some commentators argue that such provisions are in breach of the Equality Act 2010. If there is no partnership agreement, the Partnership Act 1890 provides that the courts can dissolve the partnership if a partner becomes incapable. If neither of these apply, an attorney appointed under a finance LPA would be able to act on your behalf with regard to your partnership interest and you would need to consider whether that person was well suited to looking after your business interests as well as your personal finances.
The first step for limited company directors and shareholders is for the terms of the company’s governing documents, the Articles of Association (Articles) and any shareholders’ agreement to be checked.
The Articles are likely to provide that if a director becomes incapacitated, he or she will cease to be a director. For example, if the current form of model Articles has been adopted by the company, these provide that a person will cease being a director if a medical practitioner treating him provides a written opinion that the director has become mentally incapable of acting as a director and will remain so for at least three months. Removing a director in this way, or by calling a shareholders’ meeting to remove him, may possibly be challenged on the grounds of discrimination.
A shareholders’ agreement could include provisions which may have a potential adverse impact, for example an obligation on the individual to offer their shares for sale in these circumstances.
If a director remains in office despite their incapacity, the fact that the position of director is a personal appointment means that it is not possible to appoint an attorney to make decisions in that capacity, unless the Articles allow this or are amended to allow it. At common law attorneys can, however, exercise the functions that you carry out in your role as a director. This covers such matters as paying bills, discharging tax liabilities, filing accounts and maintaining company records; all essential if you are the only director.
Your position as a shareholder will often carry with it voting rights and an attorney, if appointed, would be able to exercise those rights on your behalf, depending again on any relevant clauses in the Articles or shareholders’ agreement. A letter of wishes can supplement the LPA stating which functions the director would like an attorney to carry out. The letter could name an individual who they would like the attorney to consult in respect of how their voting rights are exercised to ensure that the attorney is aware of their likely wishes and feelings in particular circumstances.
Choice of attorney
It is possible to make an LPA that deals only with personal financial affairs and to draw up a separate LPA dealing with business affairs. This would be advisable in many cases to ensure the best choice of attorney for each situation.
A good choice of attorney is essential. The person appointed should ideally be someone who is familiar with the business, and certainly an individual who has the requisite knowledge and experience to take on the running of the business or to wind it up if this is considered to be in your best interests. We can discuss all the possible options with you.
If you wish to draw up an LPA to protect your business, we can advise you on how this should be done for your particular business. We would need to see the Articles, shareholders’ agreement (if any) or partnership agreement, and we can then guide you through the process ensuring that the final document is the best for your circumstances.