Payne Hicks Beach

Payne Hicks Beach

12 April 2022

Future-proofing your owner-managed business - loss of capacity

The Coronavirus pandemic has led to an increasing number of clients looking to protect their affairs in the event they lose capacity, typically using lasting powers of attorney (LPAs). Business owners should also make plans in case they lose capacity, either temporarily or permanently, at some point in the future. In this article, we suggest steps that can be taken now to futureproof an owner-managed business in the event that its sole director-shareholder becomes incapable of acting.

Why make an LPA?

If you are a sole director-shareholder, you should consider appointing one or more attorneys under an LPA to help run your business in the event that you lose capacity. Your attorneys could be trusted friends, business associates or professional advisers (provided they are happy to be appointed). Should you fall unwell and lose capacity, your shares will remain registered in your name but your attorneys will step into your shoes as sole shareholder, allowing them to take decisions on your behalf to help keep your business afloat.  

Without an LPA, no one automatically steps into your shoes as sole shareholder. Instead, a costly application must be made to the Court of Protection to appoint a deputy to act on your behalf. This can take up to nine months, during which time, lacking the management and direction usually provided by you as sole director-shareholder (and with business accounts likely to be frozen and contracts left unfulfilled), your business may go under.

Practicalities  

You can appoint any number of attorneys under your LPA, though it is usually impractical to have more than four. Each attorney must sign the LPA to confirm they agree to their appointment and understand the responsibility they are taking on. Once signed by you and your attorneys, the LPA must be registered with the Office of the Public Guardian ("OPG") before it can be used. This process usually takes 3 months, but due to Covid-related backlogs it is currently taking longer. The LPA will automatically cease in the event of your death.

Memorandum of Wishes

You can write a Memorandum of Wishes (MoW) to your attorneys, setting out your detailed wishes as to how your business assets and affairs should be managed in the event that you lose capacity, and, in addition, any limitations you wish to place on your attorneys' ability to exercise your shareholder rights. If you have more than one attorney, you can specify in the MoW the types of decisions you would be happy to be taken by a single attorney and those you would prefer to be taken either unanimously or by a minimum number of attorneys.

Although your MoW is not legally binding on your attorneys, it is signed by them to acknowledge they have read and understood its provisions and they would need very good reason to deviate from your wishes. Your MoW is a private document between you and your attorneys and you can update it at any time, for instance if you set up a new company or move into a new area of business.

The role of director

The role of director is personal; a director’s duties can only be discharged by the person holding that office (Mancini v Mancini [1999] NSWSC 799). This means that, while your attorneys will be able to exercise your shareholder rights under the authority of your LPA, they will not be able to step into your shoes as director.

To overcome this potential issue, it is advisable to amend your company's Articles of Association so as to give your attorneys an explicit right to appoint a director to take charge of the day-to-day running of your business. If there is someone in particular you would like your attorneys to appoint as director, you can include this in your MoW.

Articles of Association

The Articles of Association may also need amending to ensure they do not override or restrict your attorneys’ ability to exercise your shareholder rights. In addition, if the Articles provide that the office of director is vacated immediately in the event of incapacity, you may wish to change this so that you only cease to be a director if you lose capacity for an extended period (e.g. three continuous months). Note, however, that if you are to continue in office for any period of time without capacity, a further amendment will be required to ensure that the director appointed by your attorneys (as referred to above) is treated as if they were the sole director for the purposes of decision-making for the relevant period.

One LPA or two?

You may consider having one “business” LPA to cover your business affairs and one “personal” LPA to cover everything else. To achieve this, each LPA must specify the assets it governs to ensure that the scope of your attorneys’ authority is clear to all concerned. If in reality your business and non-business assets are intertwined and it will be difficult to distinguish between them, or if your business affairs are evolving, it may be preferable to have one LPA covering both business and non-business assets. You can then use your MoW to set out how you would like different aspects of your affairs to be managed.

Liability of attorneys

Your attorney may be required to enter into transactions with third parties on your behalf. Before doing so, your attorney must tell the third party that they are acting in their capacity as your attorney by reference to the LPA (and not in their personal capacity). Provided this has been made clear, the transaction will be treated as if it is between you (as sole director-shareholder) and the third party; so, in the event of a dispute, the third party would need to bring proceedings against you, rather than your attorney. Your attorney would only be held personally liable in relation to a third party transaction if, in entering into that transaction: they had not acted in good faith; they had not acted in your best interests; they had acted fraudulently or negligently; or they had acted beyond the scope of their authority under the LPA.

Payment of attorneys

If the LPA is silent on this subject, your attorneys will only be able to recoup their reasonable expenses. Given the potential for abuse, the OPG requires any provisions regarding additional payment (including fees for professional attorneys) to be explicitly stated in the LPA. Ultimately your attorneys will need to show the LPA to the bank to prove their entitlement to payment.

Conclusion

Owner-managed businesses are particularly vulnerable if their sole director-shareholder loses mental capacity. By following the steps outlined above you can help protect your company throughout your period of absence, ready for you to re-take the helm on your recovery.     

For further information please contact Clare Hetherington or Isobel Symonds, or call 0207 465 4300

10 New Square, Lincoln's Inn, London WC2A 3QG

DX 40 London/Chancery Lane
Tel: 020 7465 4300 Fax: 020 7465 4400 www.phb.co.uk

This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

The firm is authorised and regulated by the Solicitors Regulation Authority: SRA Number 807106

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