All good entrepreneurs plan for disaster and Lasting Powers of Attorney (LPAs) should form an essential part of their business continuity strategy, write Francesca Sassoli and Victoria Symons, of law firm Cripps, incorporating Pemberton Greenish.
You have probably thought about succession planning for your business in the event of your death and may have already put measures in place such as a Will and Key Person insurance. However, many business owners will not have thought about the possible impact of losing mental or physical capacity which is where Lasting Powers of Attorney come in.
Most people believe that losing mental capacity is something that might only happen to them later on in life, due to illnesses such as dementia. In reality we are all at risk of temporarily or permanently losing capacity at any time, as a result of a sudden serious accident or an unexpected mental or physical illness. This could have a devastating impact on your business and could undo the hard work you have dedicated to building it up.
What are Lasting Powers of Attorney?
Lasting Powers of Attorney (LPAs) are documents nominating people you trust (attorneys) to make decisions on your behalf if you are unable to do so. They are usually put in place for your personal assets but can also be used to make sure your business runs smoothly should you become incapacitated.
There are three types of Lasting Powers of Attorney to choose from for your business:
- Health and care decisions (concerning your personal welfare)
- Personal finances
- Your business interests
This article focuses on business and personal finance LPAs because of their relevance to business owners – although all individuals should consider putting health and care LPAs in place too.
You can have one LPA covering both your business affairs and personal finances – depending on your circumstances, you may wish to keep business and personal matters separate. Many people prefer to appoint different attorneys to deal with their business (where typically you would appoint a business partner) to those managing their personal finances (often a spouse), and you will need separate LPAs to achieve this.
Your LPAs should be carefully drafted so that they work alongside one another and are compatible with the governing documents for your business (see below).
The role of the attorney
Once appointed, your attorneys have authority to do anything you could do yourself in relation to your finances and business affairs. There is an understanding that once appointed, your attorneys won’t act until you have become incapable or you ask them to. Your attorneys are legally bound to act in your best interests at all times. There are strict principles and duties (set out in the Mental Capacity Act 2005) governing their actions to prevent any abuse of power; you must nevertheless pick your attorneys carefully. They should be trustworthy people who have the necessary expertise and time to make decisions about your business.
You can set out your wishes and advice for your attorneys in a side letter which can be stored alongside your LPA and updated at any time. It is possible to include preferences and instructions in the LPA itself, but these cannot be updated easily if your wishes change and may cause unforeseen complications in the future.
Your attorneys can make decisions for you if you lose capacity (e.g you fall unconscious) and can also carry out your wishes if you are mentally capable but physically unable to attend meetings or sign documents (e.g you may be in hospital recovering from an operation). While you have capacity, your attorneys must involve you in any decisions they make when acting on your behalf. Your LPA can also be used to manage your affairs for you while you have capacity but are abroad – which could be very useful if you decide to go on that once in a lifetime trip (though your attorneys may not thank you for it!)
Your LPA cannot be used to amend your Will. LPAs become invalid on your death which is when your executors will take over your affairs.
Why does your business need Lasting Powers of Attorney?
If you lose capacity without a valid LPA in place, the only option is to apply to the Court of Protection for the appointment of a deputy to manage your affairs for you. This is an expensive process which can take months, leaving your business exposed in the meantime. It is up to the Court to decide who is suitable to act on your behalf – the Court may not pick the same person that you would have chosen.
If you do not have an LPA, your business is likely to encounter various problems including:
- Difficulty accessing the business bank account
The bank may freeze the business account when they find out you have lost capacity and it will remain frozen until a deputyship order is granted, even if it is held jointly with other individuals. Without an authorised signatory to manage the bank account, there may be difficulty paying creditors, suppliers, staff or tax liabilities – which could prove fatal for your business.
- Loss of contracts
Contracts entered into when you had capacity may be conditional on your continued involvement and be terminable should you cease to be involved day to day. New contracts will also be at risk if the company is not able to make key decisions in your absence.
- Loss of leadership
A business that is unable to make informed decisions on an ongoing basis is like a rudderless ship. The impact of this on a business’s reputation cannot be underestimated. Customers and employees soon look elsewhere and stemming that tide is a monumental task.
If you have an LPA your business can continue to operate until you return to work again. If your condition is permanent, your attorneys can put in place considered alternatives, which may involve appointing a new management team or exiting you entirely to realise your investment.
How do you make one?
An LPA must be drafted carefully and correctly signed in the presence of a Certificate Provider. This is someone responsible for satisfying themselves that you have capacity to sign the document, you understand what you are signing and are not under any pressure to do so. Your Certificate Provider can be a professional (such as a solicitor or a GP) or someone who has known you for 2 years. Before it can be used, your LPA must be registered with the Office of the Public Guardian (the public body responsible for overseeing LPAs).
Once you have decided to put an LPA in place, but before you actually do so, you should seek professional advice to make sure that it is compatible with your business’s constitution. Your attorneys will be bound by this constitution and any shareholder (or equivalent) agreement in place.
It may be necessary to amend your governing documents to ensure that appointments under an LPA are effective and do not have any unforeseen consequences. The relevant considerations depend on the type of business and your role within it.
Sole traders will not have any governing documents so a valid LPA should be sufficient to nominate attorneys.
Partnerships (general, limited and limited liability partnerships)
Partners should check the partnership agreement for any clauses which may conflict with the terms of the LPA. Some agreements may include a clause automatically retiring partners who lose capacity so the existence of an LPA will not help if this is the case.
Directors are prevented from delegating their responsibilities on the board, so if the intention is that the attorneys can take management decisions, the attorneys must ensure they are appointed to the board in their own capacity rather than rely on the powers they are granted under the Lasting Powers of Attorney. This needs to be specifically drafted into the company’s constitution. Shareholder agreements also commonly contain provisions which trigger a deemed transfer of shares, or even the sale of the business as a whole, if a shareholder becomes incapacitated – these documents need to be checked to ensure the LPA and constitution work together.
What are you waiting for?
LPAs can form an important part of your business continuity plan.
At Cripps we take a collaborative approach to business continuity advice. Our Private Client and Corporate teams will liaise to ensure that your LPAs reflect your wishes, work alongside each other and are compatible with your business. We will help you set out your instructions and preferences in a side letter to give your attorneys guidance and can also provide advice in relation to Wills and succession planning.
For further advice on LPAs, Wills and business continuity planning, contact Francesca Sassoli at firstname.lastname@example.org / 01892 506354 or Victoria Symons at email@example.com / 01732 224097, or visit www.cripps.co.uk