Lasting powers of attorney for business owners

All clients 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 pertinent in the case of business owners and should be regarded as an essential part of risk management to avert a possible future crisis.

The first steps: consider the form of the business

If your client wants to put a business lasting power of attorney (LPA) in place the first consideration has to be the business entity through which your client operates. If they are a sole trader there will be no partners or co-directors who can carry on their 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 the business owner is unable to deal personally with the business’s affairs.

If your client is 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 in this situation. Subject to these points, an attorney appointed under a finance LPA would be able to deal with your client’s interest in the partnership.

The first step for limited company directors and shareholders is to check the terms of the company’s governing documents, the Articles of Association (Articles) and any shareholders agreement. 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 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 those circumstances.

If the 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 your client fulfils in their role as director. This covers such matters as paying bills, discharging tax liabilities, filing accounts and maintaining company records; all essential if your client is a sole director.

Your client’s 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 client’s behalf, subject again to any provisions in the governing documents. A letter of wishes can supplement the LPA stating which functions the director would envisage being exercised by an attorney, and perhaps stating who they would like consulted to ascertain their likely wishes and feelings to inform the exercise of their voting rights in particular circumstances.

Alternate directors

Some Articles allow the appointment of an alternate director, although this provision is not automatically included in model Articles of private companies adopted after 1 October 2009. It is important to note that an alternate director acts in their own right and is not the agent of the director appointing him. The appointing director remains in place with the responsibilities that this entails while the alternate director is under no obligation to act in the best interests of the appointing director. This compares with an attorney who is an agent who owes fiduciary duties to the person appointing them.

Choice of attorney

If your client wishes to do so, a LPA that deals solely with personal financial affairs can be made with a separate LPA dealing with business affairs which in many cases would be advisable to ensure optimum choices 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 client’s best interests.