If you are a business owner; do you know what would happen if you were physically or mentally incapable of running your business? Who would take over and step into your shoes?
Many people create Lasting Powers of Attorney (LPA) for their personal property and financial affairs to ensure that there is someone trustworthy personally chosen to deal with matters should it be necessary. As it is possible to have more than one LPA in existence at any time, more and more business owners are creating a separate LPA to cover business decisions only.
How an LPA would work in practice depends on the type of business interest you have:
The general authority under an LPA will allow an attorney to act (subject to specific restrictions contained in the LPA).
The general authority under an LPA will allow an attorney to act but it would be necessary to ensure the partnership agreement does not include any restrictions on an LPA attorney acting on behalf of the partner.
If there is no partnership agreement or LPA, what then? The Partnership Act 1890 applies. Under the Act if a partner becomes permanently unable to perform their part of the partnership contract it is possible for a continuing partner to apply to the court for the partnership to be dissolved.
The general authority under an LPA does not usually extend to the attorney carrying out the duties of the director in this capacity. This is because a director’s appointment is personal and can only be discharged by the person holding that office unless the articles of association make specific provision for this.
The model articles which are often used by small companies allow the appointment of an attorney only by the board as a whole to appoint someone to act on behalf of the company itself. There is no power for individual directors to delegate their powers and responsibilities as directors to an attorney, unless the articles specially provide otherwise.
The use of LPA for company directors have attracted more interest since 28 April 2013 when the model articles were amended by the Mental Health (Discrimination) Act 2013 to revoke articles 18(e) of the model articles for private companies limited by shares and by guarantee, under which a person would automatically cease to be a director upon an order of an court preventing the person from exercising their powers on grounds of mental health.
For companies that have adopted model articles after 28 April 2013, or have otherwise removed the model article, a mentally incapacitated director will not automatically cease to be a director. This change has raised awareness about the issue of having a mentally incapacitated director and the possible dire consequences this may have on the company’s future.
As the incapacity crisis continues it is important for business owners to consider the future of their business should physical or mental incapacity become an issue.
All business owners should consider creating a specific LPA limited to their business interests.
In conjunction with this, partnership agreements and articles of association should be reviewed, and altered accordingly, to ensure they will be workable in the case on an incapacitated business owner to enable the business to continue without too much disruption.
If you are a business owner and would like to discuss creating a business LPA contact our private client team on 01252 907829.
This article is not a definitive statement of the law. It is designed as a free update on the law at the time of publishing. It is not a substitute for legal advice on specific facts and circumstances. BakerLaw LLP and/or the writer accepts no liability or responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.