When we write a Will and plan for the future we must consider the possibility of becoming unable to look after our own affairs due to physical or mental incapacity. This can be even more significant if you own or run a business.
A Property & Financial Affairs Lasting Power of Attorney (LPA) can help in these situations because it allows you (the Donor) to give another person (the Attorney) the authority to make certain decisions on your behalf, which may include selling your home and possibly dealing with your business interests.
If you were to become mentally incapable of making financial decisions and did not have an LPA (or the “old style” Enduring Power of Attorney) then it would be necessary for someone to apply to the Court of Protection to do so, and risk the business folding in the meantime.
Do you need an LPA?
The starting point is to consider what type of business you have: sole trader, partnership or incorporated?
If you are a sole trader then an LPA will be useful because you will have an Attorney who will be able to continue or wind up the business (as appropriate), without the need to apply to the Court of Protection.
If you are a Partner within a Partnership then much depends on whether or not you have a Partnership Deed in place. While a well-drafted Partnership Deed will say what is to happen in the event of the mental incapacity of a Partner, in the absence of a Partnership Deed the mentally incapable Partner will be unable to make a decision.
Partners who have an LPA will enable continuity of the business. In the absence of a well-drafted Partnership Deed or LPA, an application to the Court of Protection will be necessary.
If your business is incorporated then the position of a director who loses mental capacity will usually be governed by the Articles of Association of the company. Articles can contain provisions where a person will cease to be a director if they lose mental capacity but this might still require an application to court, or a medical practitioner’s report.
While it is not possible for a director of a company to delegate their functions as a director through an LPA, a director who is also a shareholder may sign an LPA to appoint an Attorney to act on their behalf when voting.
Where a director is also the sole or major shareholder, there may be no ready mechanism under the Articles to remove the director. Instead, it may be possible for any other directors to terminate the incapable director’s contract of employment. If there are other directors or shareholders, it may be possible to change the Articles to allow for the removal of the director. Having an LPA allows this to happen.
In summary, while it is sensible for everyone to consider signing an LPA, this is of even greater importance where a business is involved, in which case it is sensible to consider not only an LPA but also a review of the Partnership Deed or Articles of Association.