Business Lasting Power of Attorney (LPA)
An absolute essential for every Sole Owner, Director or Partner of a business in 2017
As a business owner it is important to consider what might happen to the business if you should be incapacitated by illness or injury, who would take over the running of the business and its financial and property affairs, and what would it mean for your employees’ financial future
Whilst there may be ‘an understanding’ amongst your colleagues of what would happen should illness or injury take you away from the business, in the eyes of the law this isn’t sufficient. Unless you have appointed an attorney, fundamental business operations may not be possible – access to bank accounts may be denied, suppliers won’t get paid, contracts could be compromised or lost, insurance premiums won’t be renewed, and salaries could go unpaid. Without an attorney appointed to take care of the business, the disruption to your company could be catastrophic, and it won’t take long for the impact to be felt.
As a business owner, you matter. You commit time and money to your business and have staff and suppliers who are reliant upon you.
Business owners may have had the foresight to purchase Key Person Insurance, but this will not assist with the practicalities of running the business if that key person is ill or injured and unable to work or take decisions. For that reason, LPAs are frequently being used by prudent business owners to protect their business interests in the event they become incapacitated (it is common for people to make a specific LPA for business purposes and one for personal affairs).
If a person does not make an LPA and loses mental capacity, an application to the Court of Protection is required to access their finances which often is expensive and time-consuming. In a commercial sense, this may also hold-up the running of the business (cheque signing, payment of wages, renewals of insurance etc.).
Worryingly, many financial institutions respond to a business owner’s lack of capacity by calling-in loans and freezing bank accounts. By having an LPA in place for your business interests you can ensure that your company runs smoothly even when you are unavailable.
It is therefore a necessity for any business owner to consider the worst to ensure continuity and to protect hard earned success. A professionally drafted Business LPA is as important to your business as insurance is.
Each type of business must be assessed according to its structure. For sole traders, the owner can execute an LPA to appoint any attorney to act in the event of mental incapacity.
LPAs use in partnerships depends on whether there is a partnership agreement which allows for an attorney to act on behalf of an incapacitated partner. Where no such agreement exists an application to court may be needed to remove a partner who is incapable of adhering to the partnership terms.
For companies, Directors cannot delegate their functions as a Director unless the articles specifically provide otherwise. In many cases the Director will also own shares in the company. Therefore a solution is for the owner of the shares to have an LPA to ensure business continuity by the attorneys who can appoint a new Director in the event of the Donor’s incapacity. The LPA and the articles of association need to work alongside one another.
The benefit of a business LPA is that you decide on who will deal with your affairs on your behalf. You can also place very specific instructions and restrictions upon your attorneys as well as providing guidance on how they should deal with your business affairs.
This can all sound daunting but under the Mental Capacity Act 2005 your attorneys must act in your best interests and follow a Code of Practice, this includes considering any views and beliefs you have expressed in the past. You can also revoke your LPA at any time as long as you have capacity.
As a busy professional it is easy to brush these matters aside but as a business owner you have additional responsibilities to consider and a business LPA can give you, your partners, staff and suppliers the peace of mind that your hard earned success is protected at the worst time.
Call us FREE today on 0800 668 11 64 to find out more about how a Lasting Power of Attorney for your business could be crucial for its continuation one day
Business Lasting Power of Attorney (LPAs)
1. Overview
A lasting power of attorney is a legal document that lets the a person known going forwards as a “donor” appoint “attorneys” to make decisions on his/her behalf.
It could be used if the donor becomes unable to make his/her own decisions.
The Donor must be 18 or over and have mental capacity – the ability to make their own decisions – when he/she makes a lasting power of attorney.
If the Donor cannot make decisions then an application for a deputyship may have to be made.
Property and financial affairs lasting power of attorney
This lets the Donor choose one person or more to make decisions about money and property for you, eg:
• paying bills
• collecting benefits
• selling your home
This type of lasting power of attorney can be used as soon as it’s registered, with the Donor’s permission.
2. The effect of the LPA:
2.1 The authority the attorney has will be detailed in the legal document that is drawn up.
2.2 As an attorney you must act in a highly ethical manner and only in the best interests of the donor. You can only make a decision for the donor if you have ‘reasonable belief’ that they lack mental capacity to make that particular decision.
2.3 The required standards are set out in the Mental Capacity Act 2005 and its related Code of Practice. [see appendix]
3. COMPANIES AND THEIR DIRECTORS
3.1 Every company in England and Wales is required to adopt a set of provisions called articles of association which operate as a constitution. Some companies write their own bespoke articles of association, and others adopt pre-written model articles of association which can be found in various regulations passed by parliament.
3.2 The articles of association of a company allow the directors to manage the company. They are a fairly lengthy set of regulations which show how the company must be managed, how shares are to be transferred, how directors are to perform their duties, the relationship between directors and so on. The articles are usually “mass-produced” as Table A, for example. It is usual for there to be a provision for a director to be removed on the grounds of incapacity, and provide for all sorts of contingencies, including the incapacity of a director on the grounds of his/her mental capabilities.
3.3 A typical Table A clause states as follows:
The office of a director shall be vacated if-
…(c) he is, or may be, suffering from mental disorder and either-
(i) he is admitted to hospital in pursuance of an application for admission for treatment under the Mental Health Act 1983 or, in Scotland, an application for admission under the Mental Health (Scotland) Act 1960, or
(ii) an order is made by a court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the appointment of a receiver, curator bonis or other person to exercise powers with respect to his property or affairs;
4. Discrimination:
These types of provisions are considered to be discriminatory.
4.1 On 28 April 2013, part 3 of the Mental Health (Discrimination) Act 2013 came into force. The effect was to amend the model articles of private limited and public companies as set out in Schedules 1-3 of The Companies (Model Articles) Regulations 2008.
4.2 The Mental Health (Discrimination) Act 2013 (the “Act”) has been widely welcomed by numerous mental health charities and mental healthcare professionals.
4.3 Gavin Barwell MP, the Conservative Member of Parliament for Croydon Central, who introduced the bill which led to the Act has claimed that it will “drag the law of this land into the 21st century” and have the effect of putting “an end to archaic laws which interfere with the rights of people with mental health problems from . . . becoming or remaining a company director”.
4.4 Paragraph 18(e) of the model articles for private companies limited by shares or by guarantee and paragraph 22(e) of the model articles for public limited companies are revoked.
4.5 These articles provided that a director’s appointment could be ceased if ‘by reason of that person’s mental health, a court makes an order which wholly or partly prevents that person from personally exercising any powers or rights which that person would otherwise have’.
4.6 The amended model articles (with this paragraph removed) will apply to private or public limited companies incorporating with or adopting the model articles on or after 28 April 2013.
4.7 They will not apply to companies incorporated prior to this date and there is no requirement for those companies to amend their articles; however, they may wish to do so.
4.8 If a company incorporated before 28 April 2013 wishes to make sure that their articles reflect the change, they can either pass a special resolution to amend their articles or pass a special resolution to adopt the new model articles.
4.9 Query: It may of course be questioned whether it is at all desirable for a company to maintain the appointment of a company director on account of whose mental health issues a court has sought to remove certain powers or rights.
4.10 The issue being whether a director considered incapable of exercising such powers or rights in a personal capacity on his or her own behalf should still be in a position to exercise such powers and rights in a professional capacity on behalf of a company and its shareholders.
4.11 The provision removed by the Act dealt with that issue by automatically terminating the director’s appointment. It was precisely the indiscriminate nature of the provision (which did not account for the possibility of the director’s mental health issues being of either a temporary nature, or indeed the court order being overturned on appeal) which was understandably considered by those championing the Act to be not only draconian but also representative of an intolerant attitude to company directors who may experience mental health issues.
4.12 In removing the provision from the model articles, parliament has attempted to disassociate itself from the intolerant attitude it represented.
4.13 However, despite the worthy objectives of the Act, it does not in any way fetter the freedom of companies to decide the provisions of their own articles of association. The following observations are worth noting:
4.14 Conforming to the purpose of the Act is entirely voluntary. Companies are not legally bound to adopt model articles of association. All companies are free to adopt bespoke articles of association which contain the provision the Act removed from the model articles of association even if they do so after 28 April 2013;
4.14.1 the Act is not prescriptive. Even if a company adopts the model articles of association after 28 April 2013, there is nothing to prevent that company from redrafting those articles and re-inserting the provision; and
4.14.2 the Act is passive. It neither removes, nor renders ineffective, the same provision contained in articles of association adopted by a company prior to 28 April 2013.
4.15 By January 2013, there were over 2.7 million active companies in England and Wales. A great number of those companies may have the provision in their articles of association either because (i) they adopted the model articles of association which contained it, or (ii) it was contained in bespoke articles of association they adopted instead of the model articles of association.
Unless each of the 2.7 million companies which have the provision in their articles of association passes a resolution to remove it, that provision shall remain a part of each of their constitutions.
4.16 Given the above observations, it may be concluded that insofar as the Act relates to companies, its importance does not lie in putting “an end to archaic laws which interfere with the rights of people with mental health problems” – as it clearly does not do that at all – but rather, as David Nuttall MP, the Conservative Member of Parliament for Bury North more astutely observed, “its greater importance is in the wider message it sends to society about how we should see those who, sadly, suffer from mental health problems”
5. BUSINESS LPAS
5.1 Business continuity is one of the key elements in business planning. The main objective is to ensure the efficient running of the business in the event of any disruption which could happen if you became incapable of running or making decisions about your business, either due to physical or mental incapacity, or simply because of your personal circumstances or being out of the country.
5.2 Company owners should make arrangements to ensure their business continues to operate in the event that they become incapacitated.
5.3 If there are no plans in place for someone to have the legal authority to sign cheques and oversee the running of the business, there is every possibility that by the time the Court appoints someone to run it on behalf of an incapacitated owner-manager, the business will have already failed.
5.4 A lasting power of attorney is a legal document that enables a selected person, or persons, to take over the day-to-day running of a business should the owner be either mentally or physically unable to do it themselves.
5.5 A common mistake many people make is to assume that because they have a will, everything is in order. In fact, a will only takes effect on death; it has no bearing on your business if you lose the capacity to run it but are still very much alive.
5.6 Accidents and illnesses that leave people incapacitated or hospitalised for extended periods can strike at any time and any age. According to the Department of Transport Road Casualties Annual Report, 22,660 people were seriously injured in road traffic accidents last year.
5.7 Over 130,000 people in England and Wales suffer a stroke each year, with around 10 per cent of those being under retirement age. One person in every 500 has Parkinson’s and, of those diagnosed, one in 20 is under the age of 40, while more than 1,000,000 people in the UK are living with dementia.
5.8 A lack of knowledge or “ostrich syndrome” is putting businesses at risk of being left in limbo or going under. People tend to think things like this will never happen to them or they have to be old before they suffer a debilitating illness, but “thirty somethings” are no more immune to injury or illness than the rest of us.
5.9 And it’s not just the business that will be affected either. The family of the company owner will be left unable to access funds to live off, adding considerable financial worry at an already very distressing situation.
5.10 A power of attorney for business is a legal form authorising someone to act on behalf of a business. The form typically details the settings and transactions where the person has power of attorney, rather than granting a general power of attorney that would allow the authorised agent to act completely freely. There are a number of settings where such documents can be useful and people interested in giving power of attorney to a person associated with a business can discuss the specifics with Thy Will Be Done who are Business LPA specialists.
5.11 Power of attorney forms provide legal authority for a person acting as an agent. A power of attorney for business can allow people to sell securities, access financial accounts, place orders, write cheques, and perform other activities needed to keep a business running. It can also limit certain activities such as hiring and firing powers or access to certain accounts for security reasons. When a person exercises this power, any decisions made are treated as though they came from the business itself.
5.12 Thy Will Be Done can create an LPA tailored to your specific needs which will ensure that the document clearly outlines all of the permissions and restrictions you want.
5.13 A power of attorney for business can be effective at all times, or only take effect under certain circumstances, like when the primary decision-maker is not available or is incapable of making decisions. When thinking about a power of attorney, business owners should think about the needs of the given situation and consider what kinds of powers they want to grant and when. It is also important to discuss it with the person being granted power of attorney, so that individual has an understanding of what is expected.
5.14 Generally, someone acting with power of attorney is expected to make decisions in the best interest of the business and its operators. These decisions might not necessarily be those that the person would make personally, but they support the stated goals of the business. The decisions must also be within the scope of the law; someone acting under power of attorney for a business cannot use these powers to coordinate illegal activities.
5.15 What would you do if you couldn’t make the day-to-day decisions?
5.16 Very few people know that once you are unable to manage your own affairs, there is no one else (not even your closest family member) that is automatically given the power or authority to deal with your affairs on your behalf. So, if any orders need to be fulfilled, wages paid, documents and cheques signed, having someone that has the authority to deal with these matters can be essential.
5.17 You can save time and avoid distress for your business by engaging Thy Will Be Done to draft your Lasting Power of Attorney appointing somebody you trust to deal with your affairs whenever you need them to act on your behalf.
5.18 The LPA enables you to appoint someone (an “Attorney”) to look after your financial affairs and property when you are unable to deal with them yourself. This could be because you are away or you are ill or even become mentally incapable due to an injury or an illness such as Alzheimer’s.
5.19 You can decide on who will deal with your affairs on your behalf and you can place restrictions on and give guidance to your Attorney(s) on how they should deal with your affairs. The LPA will allow your Attorney to act on your behalf in respect of all your property and financial affairs. Alternatively, you can restrict your Attorneys’ powers or get Thy Will Be Done to create specific LPAs which only deal with certain issues, such as your business affairs.
6. Who should be your Attorney?
6.1 By making an LPA, you make the decision about who acts on your behalf. If you are making an LPA in respect of your business affairs only, it makes sense to appoint someone who is familiar with the business. The partners in a business could appoint each other, or you could appoint someone in your family who knows the business well.
6.2 If you are making an LPA in respect of all of your financial affairs (not just your business), you could appoint anyone that you know and trust to deal with your affairs, and who knows you.
6.3 You may choose how many Attorneys you would like to appoint. It is possible to appoint just one Attorney. But if that Attorney dies, becomes mentally incapable or even bankrupt, then the power ends and you would need to make a new document again provided you are able to do that. So, it is always advisable to appoint a replacement Attorney in the event that the first and only Attorney is unable to act.
6.4 Alternatively, you can appoint two or more Attorneys and you may choose on how they act on your behalf:
• Jointly – this means that they will always have to act together. This ensures that your Attorneys will have to agree on everything and act together at all times. But if one of them is unable to act or dies, then the power ends because the other Attorney cannot act alone.
• Jointly and severally – this means that your Attorney can act together but they can also act independently of each other if necessary. This type of appointment is more flexible because if one Attorney is unable to act, the other has a right to act on his own.
• Jointly in some matters and jointly and severally in other matters – this means that you can specify when your Attorneys should act jointly and when they should act jointly and severally. Again, the power would be limited as some matters could only be dealt with jointly as mentioned above.
7. What decisions can the attorney make in respect of your financial affairs?
7.1 The decisions that your Attorney(s) can make include matters such as:
• buying, selling or maintaining company property including insurance and repairs
• accessing, opening and closing bank accounts;
• access to financial information;
• investing powers;
• taking part in boardroom decisions or partnership decisions;
• other corporate activities
7.2 The Attorney(s) must act in the best interests of the Donor and must follow the Code of Practice set up by the Mental Capacity Act 2005. They must take into account your wishes.
8. When can the attorney act?
8.1 An LPA relating to your financial affairs can be used as soon as it is registered with the Office of the Public Guardian, regardless of your mental capacity, provided there are no restrictions.
8.2 Whilst you are still mentally capable, you make decisions regarding your financial affairs yourself. Your appointed Attorney will carry out your wishes if you cannot carry them out yourself or if you instruct them to deal with some matters on your behalf, provided you have not restricted the power to be valid only if you lose mental capacity.
8.3 If you have lost the capacity to make the decisions yourself, your appointed Attorney will make and carry out the decisions on your behalf.
8.4 As long as you are still able to make decisions on your own behalf, you can revoke an LPA at any time and you do not need to give a reason.
8.5 Once the LPA is registered with the Office of the Public Guardian, your Attorney can act on your behalf when it is necessary (e.g. when you are ill or simply away temporarily) and you have a peace of mind that your Attorneys can continue acting on your behalf if you were to lose capacity to deal with your affairs.
9. What if a person does not make an LPA and is no longer able to deal with their affairs?
9.1 Without a Lasting Power of Attorney, an application would have to be made to the Court of Protection in order for someone to be appointed as the Deputy if the incapacitated person becomes unable to handle their affairs. This process takes longer than obtaining a Lasting Power of Attorney is very expensive and time consuming and ultimately it is up to the Court as to who is appointed as Deputy. There are a series of restrictions placed on which actions Deputies may perform and they will be supervised by the Court accordingly which will involve submitting accounts.
9.2 As far as companies and businesses are concerned this is more or less a disaster course – delays, lack of understanding of the business, etc and should definitely not be considered as an automatic back stop.
10. CONCLUSIONS
10.1 All businesses should have Lasting Powers of Attorney in place: if not, and the business owner loses capacity, a Deputy appointment is necessary which can take several months to arrange. How will the business survive during those months with no one able to decide on the owner’s behalf?
10.2 Many businesses operate as sole traders or with one or two directors. If anything happens to one of these individuals, such as a road traffic accident, a serious sports injury, an operation that goes wrong, or they were in any other way incapacitated for a period of time this would seriously affect the running of their business. There is no automatic assumption that if there are two or more directors, these directors would automatically be able to continue running the company. In most instances, the companies articles dictate how many directors are needed to make company decisions. If you do not have sufficient directors, then your company has a problem.
10.3 When it comes to paying bills, the majority of companies invoice on either a 14 or 28 day basis. If a director is unavailable for more than two weeks creditors would soon start to demand payments. If the director is unavailable for 28 days or is unable to sign cheques or make bank transfers, on day 29 creditors would be considering what suitable actions to take regarding the outstanding invoice.
10.4 If the company has to service a business loan or mortgage through a bank and one of the
directors is incapacitated for a period of time, they may consider whether to pursue recovery of
their loan or outstanding mortgage. Equally, banks may consider freezing the company’s bank
accounts, as one of the directors is no longer able to function or sign as a director.
10.5 In today’s climate, many companies use personal assets as guarantees against business
losses. This might be your house, other valuable assets, or in some instances even someone else’s
house (with their permission). If your company went into liquidation, as no one could make
company decisions, creditors would not only seek whatever assets the company held, but also
any assets held as guarantee. This may result in not just the company being lost but also the
property as well (or someone else’s property).
10.6 The question to ask is this: As a director, is my business protected if I or a fellow director
were unable to make decisions?
If the answer is no, then you should investigate making a Financial LPA to protect you, your
business and your family by calling Thy Will Be Done who are specialists in Business LPAS
FREE on 0800 668 11 64.
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