Lawrence Stephens

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Why Business Owners Should Review their Power of Attorney

January 2022

While some business owners may have LPAs in place to cover their financial affairs if they lose capacity to make decisions, many will have attorneys that are their spouses, or other family members.

However, few family members are qualified to sit on a company board or experienced in making key decisions about a business, which is often a client’s most valuable asset.

An Introduction to LPAs

A business LPA is a type of financial LPA that deals specifically with the donor’s interests in a particular business, separately from general financial decisions. It enables a suitably qualified attorney to take over the donor’s management functions, either to maintain continuity, or to enable an orderly exit from the business.

As a bare minimum any business owner, director, partnership member or shareholder with voting rights should have a financial LPA in place. Ideally, they should have a business LPA.

Consequences of not having an LPA

If an individual is the sole director of a business, or a sole trader, their business bank accounts will usually be frozen when they lose capacity and they will be unable to enter contracts, or appoint other directors to take on their functions.

The court could be asked to make an emergency ord

er, but this can prove stressful and costly and without guaranteed success. As a bare minimum any business owner, director, partnership member or shareholder with voting rights should have a financial LPA in place. Ideally, they should have a business LPA.

Characteristics of a business LPA

The appointment of suitable attorneys (see below) is vital, but so are the instructions that govern the extent of their powers and the way they must be exercised.

It should also include legally binding instructions setting out the business decisions with which attorneys are allowed to deal, and those areas in which they do not have authority to act. Attorneys are appointed to make management decisions on behalf of the donor, not to take over their job.

The exact scope of the attorney’s role will be specific to the donor’s business. The attorney would be responsible for complying with any professional regulatory requirements and may need to be noted as a person with significant control on the Companies House records for the business.

Interaction with company law

Lasting powers of attorney are governed by the Mental Capacity Act 2005, while companies are governed by the Companies Act 2006. The two do not always co-exist harmoniously.

Companies might, for example, have articles of association that mandate the removal of directors who lack capacity, or that do not allow for the appointment of ‘proxy’ directors (including attorneys). Similar situations can occur with partnership agreements.

Such clauses are likely to be discriminatory under current equalities legislation and the company’s ability to remove a director could be complicated. It is important, therefore, that a company or partnership’s governing documents are reviewed and, if necessary, amended at the time a business LPA is drafted.

Even without an LPA, any attempt to unseat an incapacitated director or partner, would be likely to be open to legal challenge under discrimination legislation.

Appointing suitable attorneys

The attorney should understand the donor’s business and be trusted by the donor to act according to their wishes. Though the instructions in the LPA document are important, so is the choice of attorneys who will interpret them correctly.

In many regulated professions, the management of a firm can only be carried out by a suitably qualified professional.  So if the donor is a partner in a firm of chartered accountants, then any business attorney they appoint will also need to be a chartered accountant.

Often the most appropriate attorney will be another director or partner within the donor’s firm. However, there are other cases, where an independent person, such as a solicitor or accountant, is better placed to represent the donor’s interests.

One such situation might occur where the donor is a director of a family business, in which the other shareholders have conflicting priorities.