Anyone can lose the ability to make decisions for themselves at any age, due to an accident or illness. If you own a business, what would happen if you lost mental capacity?
Generally if you lose mental capacity and you haven’t made a Lasting Power of Attorney, someone would need to apply to the Court for a Deputyship Order to act on your behalf. This is expensive and the applicant may not be who you would have chosen. The process can also be lengthy – typically taking between 3 and 6 months to complete. In the meantime, nobody can make financial decisions on your behalf.
Even if your bank account is held jointly with your spouse, it can be frozen until a Deputyship Order is produced. Business accounts can also be frozen, even where these are held jointly held in the names of business partners or directors. With no funds, businesses in these circumstances can fail.
Having a Business Lasting Power of Attorney in place allows someone that you trust – someone who understands your business – to take over the day-to-day affairs as soon as they are needed. Your attorney might be given the power to pay suppliers and staff, access and manage bank accounts, invest assets, handle tax matters and enter into contracts. Of course, you can limit your attorney’s power, but you need to ensure that the company can continue to operate with any limits in place.
There are different considerations for business LPAs, depending on what type of business you have.
Sole traders run their businesses as individuals – the business is not therefore legally separate from the business owner. A business LPA will often be advisible for a sole trader – indeed, the lack of an LPA exposes your business to unnecessary risk.
Partnerships will be subject to any Partnership Agreement, together with the provisions of the Partnership Act 1890 or the Limited Partnerships Act 1907. Partners need to consult their partnership agreement as this may contain provisions relating to the incapacity of the partners. Of note however, provisions removing partners who lack mental capacity may be in breach of anti-discrimination legislation. In order to manage a potential situation with a partner who lacks mental capacity and to reduce the risk of discrimination claims, the partners should each consider putting in place a Business Lasting Power of Attorney.
Limited liability partnerships are subject to the Limited Liability Partnerships Act 2000 and subject to many of the provisions of the Companies Act 2006. They often adopt Model Articles of Association. Members of an LLP should review their articles and remove any potentially discriminatory clauses. They may then wish to each appoint an Attorney using a Business LPA.
Many companies use the Companies (Model Articles) Regulations 2008 which used to contain provisions allowing the removal of directors who lacked mental capacity. However, these were amended in April 2013. From this date, various provisions were removed from Schedules 1, 2 and 3 of the Articles by the Mental Health (Discrimination) Act 2013, including Paragraph 18(e) of Schedule 1 which stated:
“[A person ceases to be a director as soon as] 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.”
However, although not expressly revoked, it is possible that attempts to remove a director who lacked mental capacity under Paragraph 18(d) of the Model Articles (and similar provisions contained in Schedules 2 and 3) would also fail if the grounds for or process of removal were found to be discriminatory. Paragraph 18(d) states:
“[A person ceases to be a director as soon as] a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months.”
Directors need to check their articles of association for similar clauses. In order to protect the company’s interest and avoid possible claims of discrimination, it makes sense for all Directors to execute a business Lasting Power of Attorney.
Some have claimed that individual directors cannot delegate their authority or authorise a proxy and often you will hear the New South Wales case of Mancini v Mancini cited in which it is stated:
“The office of a director is not a property right capable of being exercised by an attorney or other substitute or delegate of the person holding the office.”
However it is important to appreciate that this case is not an accurate representation of English, Welsh or Scottish law (nor Australian for that matter). Directors may amend their articles of association to include delegation authority by an individual director, if the articles do not already permit it.
Unless the director is a sole director, he/she cannot appoint an individual to be a director in his/her place without the board of director’s approval. However, if the rules of agency are applied, a principal (donor) is able to appoint a proxy (attorney) to make decisions on their behalf. This is not the same as appointing someone to be a ‘full’ director. When an LPA is used in a business context, the underlying principle is that the nominated attorney remains the agent1.
Actions for directors:
Business LPAs are made on form LP1F (the same form used to deal with personal property and financial matters). They are made in much the same way as a personal LPA and the same rules apply, governing for example who can act as an attorney, the certificate provider, and witnesses.
An important point to note is that if you decide to make both a business LPA and personal LPA, each needs to contain instructions in Section 7 of the form limiting their scope – i.e.
To answer this question, refer to Section 4 of the Mental Capacity Act 2005 which states that attorneys must:
“…so far as reasonably practicable, permit and encourage the person to participate, or to improve his ability to participate, as fully as possible in any act done for him and any decision affecting him.”
Attorneys must also consider the Code of Practice for the Mental Capacity Act 2005, particularly Section 7.52.
You can use the same person as your attorney for your personal financial LPA and business financial LPA if you want to. However, in many cases, it will be inappropriate to appoint the same person to manage both personal and business affairs on your behalf. Capability, conflicts of interest, requirements of regulatory bodies, insurance and the partnership agreement or articles of association are just some reasons why this may not be possible or, indeed, advisible.
If you do intend to use the same attorneys for both personal and business regardless, you can just create a single LPA on one LP1F form.
If you are using the same form to appoint the same attorneys for both your personal and business matters, it is advisable to set out clearly that the form is intended to cover both. The Code of Practice for the Mental Capacity Act 2005 contains a list of the types of decisions that a property and financial affairs attorney might make (subject to any express restrictions made on the LPA form). Although the list is not exhaustive, it is indicative – and notably, the emphasis is on decisions that relate to your personal property and personal financial affairs, such as paying the mortgage and household expenses. Setting out expressly that the LPA is intended to apply to your business avoids any doubt.
No. Attempts by donors to appoint, on a single LPA form, different attorneys to make decisions regarding their personal and business affairs have been rejected by the Office of the Public Guardian.
This article is intended to provide a general overview and is not a substitute for professional advice. Call us on 08700 120 130 or email email@example.com for an appointment.
1 Craig Ward, MSc Solicitor, Business and commercial LPAs
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