By Daniel Boyle, below, Head of Lifetime Estate Planning & Summertown Office, Hedges Law
What would happen to your business should the owner or ultimate decision-maker become incapacitated due to injury or illness? The answer is likely to be, “I’m not sure.” That’s because very few company owners in the UK have a business Lasting Power of Attorney (LPA) in place.
You are more likely to be familiar with personal LPAs, which appoint an attorney to make healthcare or financial decisions for someone, should they become incapacitated, but they can also help to protect a business in the event of a catastrophe.
A business LPA gives small and medium-sized businesses protection against the unexpected. Without one, companies may have to abruptly stop trading should an owner or director become incapacitated and can no longer make business decisions.
Is a Business LPA right for me?
If you are a sole trader, your business is not likely to have a separate legal entity from you. This means that appointing an attorney under a business LPA will be an effective way for you to make provision for the continuity of your business, in the event that you are incapacitated.
If you are one of several partners in a partnership, you’ll need to check the terms of the partnership agreement. Some agreements may already include provision for what would happen should one of the partners become incapacitated. If such a provision exists, it may already adequately provide for the continuity of the business, in which case, a business LPA wouldn’t be necessary.
However, if you’re in doubt about the provision made in the partnership agreement, or you feel that an LPA may be required, you should seek advice on the wording of the LPA, to ensure that it doesn’t conflict with the provisions already made in the partnership agreement.
Directors of companies: articles of association
If you’re a director of a company, check the company’s articles of association. Very often, articles of association will provide for the termination of a director’s appointment in the event that the director loses capacity. This is often done to protect the company’s interests. If such a provision is not included in the articles of association, you may want to seek advice and consider including such a provision.
If you are the sole director of a small private company, the articles of association are not likely to simply terminate the director’s appointment, or there would be no one else to continue running the company. In such circumstances, a business LPA would be appropriate.
Not convinced your company needs one? Here are eight reasons why it pays to hold a business LPA and how it will protect your business and those who depend on it – should the worst happen.
- The business can continue in the event that something happens to the owner
When a business LPA is put in place, you are appointing someone to make the everyday decisions required to keep that business going. If the owner can no longer make decisions, whether from illness or an accident then the LPA comes into effect.
This person, or people, can be granted the authority to sign off new contracts with suppliers, pay bills, and make any other operational decisions required so the company can continue to run without disruption. Depending on the complexity of the business, a senior leadership team or board can be formed if the owner, or the ultimate decision-maker becomes incapacitated to ensure those at the helm have the right set of skills and experience.
- Prevent bank accounts from being frozen and staff and suppliers going unpaid
Did you know that business bank accounts could be frozen if the owner became incapacitated? This could mean that no transactions would take place, staff could go unpaid, along with other important bills. Relationships with vital members of staff could be destroyed. Goodwill with your suppliers could be at risk and there would be the potential for breach of contract claims to be brought against the company.
If there was a business LPA in place then this could be avoided as the appointed attorneys could be given the authority to manage the business banking the moment an owner can no longer do this themselves.
- Stop insurance policies from becoming invalid, putting the business at risk
Depending on the details of any insurance policies that are in place, you may find that the business is no longer protected if the owner becomes incapacitated. What’s the risk to the company if insurance policies become invalid?
When you put a business LPA in place, it would be wise to review all your company insurance policies to check how the company would be affected if an owner were to become incapacitated and review what additional insurance policies may be required – such as key person insurance.
- Meet your business obligations, fulfil orders, and adhere to existing contracts
A business LPA allows you to choose the right person, or people, to take over decision-making for the business in a timely manner, and who will have the legal authority to do so. This means that the company can continue to fulfil contracts on time. If attorneys have been selected wisely, then they can also maintain effective communication with all parties involved to ensure minimal disruption and adhere to all the relevant laws and regulations to ensure the business continues to function, protecting its long-term reputation.
- Ensure the company remains compliant
Again, this is where your choice of attorney is so important. They need to understand the business and the industry to be able to communicate effectively with regulatory authorities, other directors, and staff to ensure compliance. They must be able to mitigate any risks and implement any changes required if there are any regulatory changes.
If the wrong person takes on this role, then regulatory breaches could occur and have negative effects for other directors. When unauthorised and incorrect decisions are made, such disruption puts the company’s reputation at serious risk.
- Be able to make the decision in advance to ensure the person with the right skills will take over decision-making
If an attorney has not been assigned to run the business, then who would step in? A member of the family? Would they be the best person to take over? To eliminate the risk of someone without the required skills taking over, great care should be taken when selecting attorneys. It’s important that all business owners understand the power that will be granted to those attorneys once the LPA comes into force.
Appointing a spouse, relative or friend to oversee the business should disaster strike, isn’t advisable as relationships change and they may not be the person with the best knowledge of the business.
- Disputes between board members or with inexperienced attorneys over critical business decisions can be avoided
Real consideration should be made as to who you are appointing to oversee your business. Have they previously been involved, and is their knowledge up to date? If not, then you could be asking for trouble. Conflicts over decisions with the other members of the board are very likely if they don’t know enough about the company.
This is something that an experienced solicitor can discuss with you and help you to decide who would be the best people to select as attorneys. The appointed persons will need to make critical business decisions. They must possess the right skill sets and be knowledgeable about the business.
- Avoid disruption and retain vital staff and customers
No one wants operations to be disrupted – let alone the outright chaos that can ensue when no one knows who’s in charge. Few businesses would survive for long without someone to take charge and ensure any issues are resolved quickly. Any disruption can lead to a loss of staff and customers, and it could take years for a business to recover from prolonged disruption – if it survives at all.
If the right attorneys are appointed, then disruptions can be avoided until the business owner can return or longer-term plans are put in place. When a business LPA is scoped to a high standard then the most appropriate people can be put in place to make decisions, and all business documentation can be aligned including the Articles of Association to ensure that any new directors can take over, allowing the board to continue to function.
A business Lasting Power of Attorney (LPA) is the best way to ensure the continuation of a business if an owner or ultimate decision-maker becomes incapacitated. It should be properly scoped and aligned with all other business documentation to ensure the smoothest transition and the least amount of disruption to operations. The choice of attorney is of vital importance. An experienced solicitor can help you to select the right person or people to take on this role.