• The Business Owner

Is your business protected if you no longer have mental capacity?

According to the Office of the Public Guardian, in the UK, around 40% of us have created a will, however less than 1% have put lasting powers of attorney (LPA) in place.

Without an LPA issues can arise in both your personal and business life should you lose mental capacity unexpectedly or in the future. When you own a business, these issues can be magnified, particularly when others depend on you!

Janine Guthrie, a Court of Protection lawyer at Willans LLP, outlines some top tips for business owners to help safeguard their interests in future.

If you’re a business owner, what can you do to mitigate the risks on your business?

Consider what type of business structure you have in place - is it a limited company, a partnership, limited liability partnership or are you a sole trader?

· Shareholders and limited company directors

The first thing to do is to look at the company’s articles of association (articles) and any shareholders agreement. The articles may well provide that if a director becomes incapacitated that person will cease to act in that capacity. A shareholders’ agreement could include provisions which could include an obligation that in those circumstances, the incapacitated person’s shares are offered for sale.

The position of director is a personal appointment, so an attorney cannot be appointed to make decisions for you in that capacity unless the articles allow it. However, a shareholder often has voting rights and an attorney, if appointed, would be able to exercise those rights for you, subject again to any provisions in the governing documents.

· Sole traders

If you are a sole trader then it is extremely important that you have an LPA in place. This means that if you lose mental capacity, someone you have appointed can run the business for you. It may not be the same person who you have appointed to look after your everyday financial affairs outside your business and you would therefore draw up two LPAs, one for your business and the other for your personal finances.

· Partnerships

Here, you would look first at the partnership agreement. If no such agreement exists, then the Partnership Act 1890 allows the courts to dissolve the partnership in this situation. It does follow therefore that an attorney appointed under a property and financial LPA would be able to deal with your interest in the partnership if necessary, in an interim period.

What are my options?

Depending on your business, you should either make an LPA for your business, revise your shareholders agreements and partnership agreements, and check your articles of association.

A business LPA is a document similar to a personal LPA, but one that specifically deals with your business. It will specify that a particular person, or people, you appoint can deal with any matters specifically relating to your business if you are unable to, because you lack mental capacity.

What happens if I don’t put an LPA in place and I’m unable to make business decisions down the line?

If an individual did not have an LPA relating to your business, then a suitable person would need to apply to the Court of Protection for a deputy order.

The Court of Protection is a specialist court that was set up under the Mental Capacity Act for people who are unable to make decisions for themselves regarding their money, property, health and welfare. The court can decide whether someone has mental capacity to make a particular decision and can appoint a deputy if there is a need for someone to manage their affairs for them.

This can take several months and is an expensive process. Where a business is involved time delays can create significant issues for the owners in the meantime. Without a valid power of attorney, it is possible, for example, that uncompleted transactions could not be finalised, stock could not be purchased and employees might not be paid.

How do I choose an attorney, and what is their role?

You would need to consider a variety of factors when choosing your attorney to help establish whether they are suitable for this role. A legal professional can help you through this process to ensure you are nominating someone appropriate.

Once in place, the LPA will allow your attorney to make financial decisions on your behalf, including buying and selling property, organising property insurance and repairs, accessing bank statements, opening and closing bank accounts, investing assets, and dealing with tax affairs.

You can appoint more than one attorney, and specify attorneys to act jointly in some matters, but separately in others. For example, a trusted business associate who knows the business could act on your behalf alongside a family member, to negotiate contracts independently of the second attorney, but only access bank accounts with the approval of the second attorney.

Your attorney must ensure that they fully understand their responsibilities, e.g. they must take out their own personal liability insurance to ensure they are protected whilst acting on your behalf and commit to follow health and safety regulations and policies too.

Irrespective of the size of your business, a comprehensive review of your company's governing documents combined with an LPA should be undertaken and reviewed on a regular basis. Get in touch if you would like clear, approachable legal advice on this process.

For legal advice on the Court of Protection and deputyship, contact Janine Guthrie on 01242 541568 or janine.guthrie@willans.co.uk. Alternatively, visit willans.co.uk for more information.