What happens when a director, shareholder or partner in the business loses mental capacity? It’s important to consider what would happen to your business if you were unable to manage the finances. Eve Carter, head of private client services at Harrison Drury Solicitors explores.
When running a business, it’s important that you think about what would happen if you became incapable of dealing with the running of the company and its day-to-day financial management.
It may be that your colleagues know what needs to happen but unless there is designated legal authority in place, it’s not quite that simple. It may become impossible to access bank accounts, pay salaries and suppliers and the effect of the disruption could be significant.
It is possible to make a business or commercial Lasting Power of Attorney (LPA) to provide for this eventuality. You can choose attorneys specifically to deal with your business assets and ensure business continuity in the event that you are incapacitated.
What is a Lasting Power of Attorney?
An LPA is a legal document which enables you to appoint a person or persons to act on your behalf. There are two types of document, one for property and affairs and one for health and welfare decisions. It is customary to make an LPA appointing family members to look after personal affairs, whereas a commercial LPA appoints professionals and colleagues to deal with business affairs. Each document specifically defines its area of use.
What if I don’t make an LPA?
If you don’t have a LPA in place and you do lose capacity an application will need to be made to the Court of Protection for the appointment of a deputy. This deputy will act on your behalf under the authority of the court. This is an expensive route and can take six months to put in place and there are no guarantees of who the court will appoint.
Is a business LPA he best solution for me?
The first step in preparing a business LPA is a review of the company’s articles of association, and partnership or shareholder agreements:
- Sole trader – your business is not likely to have a separate legal entity from you and appointing an attorney under a business LPA will be an effective way to provide continuity for your business.
- Partnerships – The partnership agreement will need to be checked. Some partnerships already include a provision for what will happen if one of the partners becomes incapacitated, so an LPA may not be needed. If the wording is inadequate, an LPA can be made to carefully complement the provisions already in place and offer additional protection.
- Directors of companies: articles of association – the company’s articles of association may call for the termination of a director if they lose capacity. This is often done to protect the company’s interests. If such a provision isn’t included, you may want to seek advice and consider including it.
Sole directors and directors of small companies are not likely to include a termination clause as there would be no one left to run the company. In these circumstances a business LPA is advisable.
The second step is identifying a suitable attorney. This should be someone that you trust and is familiar with the business and market you operate in. They need to be able to make the decisions needed for the-day-to-day running of your business.
Your attorney needs to ensure that they fully understand the responsibilities. They will need to take out personal liability insurance, so they are protected while acting on your behalf and commit to follow health and safety policies.
Business succession can be a wider issue and after a review of your company’s structure you may decide that restructuring would be more suitable for your company. Harrison Drury has a team of specialists who can review your company’s legal structure and work to provide the best solution for succession planning. Get in touch with Eve Carter on 01772 737379.
