Services

Director Succession

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.

Types of business

There are different considerations for business LPAs, depending
on what type of business you have.

Sole traders

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.

Partners

(General partnerships and limited partnerships)
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

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.

Company directors

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 thet 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.

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 agent.

Actions for directors



  • Check to see if your articles of association include delegation
    authority by an individual director. If not, you may wish to amend
    the articles by special resolution.


  • Check to see if any provisions of your articles may be considered
    discriminatory under the Mental Health (Discrimination) Act 2013
    and amend by special resolution as necessary.


  • Consider whether all Directors should make a business LPA to
    protect the company’s interests.


  • If you are in any doubt, contact Jonathan Maskew at April King who
    will put you in touch with one of our commercial lawyers.

How do I make a business LPA?

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.

  • The personal LPA should specify that your attorneys have
    general authority to act in relation to all of your property
    and financial affairs except for the relevant business, in
    respect of which you have executed a separate lasting power of
    attorney.
  • The business LPA should specify that your attorney’s authority
    is limited to your business.


When does the attorney’s authority end for a business LPA?

To answer this question, refer to Section 4 of the Mental
Capacity Act 2005 which states that attorneys must:

“As 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.

Q: Can I use the same person as my attorney for my personal
financial LPA and business LPA?

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.––

Q: Can I just make one LPA and appoint different attorneys for
personal finances and business finances?

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.

What now?

This article is intended to provide a general overview and is not a
substitute for professional advice. Call us free on
0800 788 0500 or email
info@aprilking.co.uk for an appointment.