Why is Lasting Power of Attorney for business so important?
Published 31st March 2021 | Probate & Power of Attorney

Why is Lasting Power of Attorney for business so important?

It's important to have a Lasting Power of Attorney for business, should you lose mental capacity.

Do you run a business? Have you organised a Lasting Power of Attorney (LPA) should you lose mental capacity? We explain why it is so important to be prepared and to make plans to protect you, your family and your business.

Many of us will know the importance of having a Lasting Power of Attorney (LPA) to manage our personal affairs, should we lose mental capacity. Examples of this could be due to an illness, such as Dementia, or from a brain injury. Having an LPA will ensure that decisions about our finances, health and living arrangements will be made by people who understand what we would want.

However, this is not the only type of LPA you might need. If you are responsible for a business, you should have in place a Business LPA, should the circumstances arise.

What is a Business Lasting Power of Attorney?

A Business LPA is an arrangement that is specifically for the purpose of ensuring that your senior role in a business is managed appropriately, should you lose mental capacity.

You are likely to need a Business LPA if you are:

  • a business owner
  • a sole trader
  • a sole director of a company
  • a member of a board of directors.

In other words, you will need it if your decisions could be crucial to the smooth running of the business.

A Business LPA is distinct from a general power of attorney document. These are sometimes put in place by businesses so that decisions can continue to be taken in the event of a director being absent on a temporary basis. The crucial difference, however, is that this type of arrangement ceases to apply if the person in question loses mental capacity, whereas this is precisely when a Business LPA comes into its own.

Why would you need a Business Lasting Power of Attorney?

Whether you are a business owner or director, there are things that require your consent, and perhaps your signature, to go ahead. This may, for example, include paying bills or authorising the payment of salaries. Being unable to carry on with these could mean the end of the business.

In the event, that a director loses capacity, often a Company’s Articles of Association will direct the removal of that director. However, a company with a sole director is unlikely to have this clause in the Articles as it would lead to the only director being removed from office. Even if the company has other directors, it may be appropriate for them to appoint Attorneys to oversee the company in the event of a loss of capacity.

In the long run, of course, this situation may be untenable. However, having a Business LPA will allow the business to continue smoothly in the short term, while the Attorney can arrange a satisfactory exit from the business that will benefit everyone.

What is the alternative to a Business Lasting Power of Attorney?

The only alternative, if you as an owner or director should lose mental capacity without a Business LPA in place, would be for your family to apply to the Court of Protection in order to appoint a Deputy. A Deputy has similar powers to an Attorney but it is not the most ideal situation.

For example, there is no guarantee that the court will appoint the person you would have wished for. The judge will certainly try to be fair and take relevant opinions into account, but they will ultimately make the decision.

Another added serious implication, however, is the time the process takes to apply for Deputyship. An urgent application can easily take longer than six months before the matter is resolved, and this means six months during which the business is unable to make meaningful decisions or pay its way. The likelihood is that there would be nothing left for the Deputy to manage.

What is important when setting up a Business Lasting Power of Attorney?

A Business LPA is crucial to get right, and there are many points to remember and pitfalls to avoid when arranging…

  • Appoint a person who is familiar with business matters and has the skills and knowledge to make appropriate decisions. This could be someone already involved in the business, but not necessarily. For example, you may wish to appoint an accountant or another professional. This would ensure the Attorney has the right level of skills.
  • Avoid appointing a member of your family, even if they are involved in the business. What is best for the family will not necessary be what is best for the business. Even if the family member is careful to separate the roles, it could make a conflict of interest inevitable.
  • Avoid appointing the same person as a Business LPA and as a personal Finance and Property LPA. Both are vital, but again there could be a conflict of interests that, at best, could put the Attorney in a difficult position.

Why is it important to seek legal advice when drafting a Business Lasting Power of Attorney?

Any form of LPA is a complex legal document and adopting a “do-it-yourself” approach could lead to serious mistakes which cannot be rectified once the LPA has been activated. This makes it vital that you get it right first time and get expert legal advice.

First of all, you will need to find out whether a Business LPA is appropriate. There may be circumstances in which this is not the case and business decisions could be made by your personal Attorney — although this is the exception rather than the rule.

You will also need to review the company’s incorporating documents at the same time as drafting the LPA, to determine whether they need to be amended. This, and the importance of wording the LPA to ensure exactly the outcome you want, this makes it essential that you seek advice from expert solicitors who specialise in LPAs.

Choosing a trusted team of professional solicitors, such as ours at Osborne Morris & Morgan, is a good place to start. Get in touch with us for more information on setting up your Business LPA and ensure that your business continues to function smoothly if you were to lose mental capacity.

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