If you are a sole trader, partner in a traditional partnership or a limited liability partnership or a company director, have you thought about who would make business decisions for you if you were away from the business or lost your mental capacity temporarily or permanently?
Most businesses manage the range of risk they perceive to be a threat: from flooding of premises to cybercrime. In our experience, though, many fail to put in place a plan for a key decision maker being unable to make decisions due to absence or a lack of mental capacity. And yet the consequences of this for a business can be as devastating as a cyber attack or a flood.
Delegation of key decision making in the absence of a sole trader, key partner or director is often effected by general powers of attorney, usually limited in scope and duration. However, planning for a situation where a key decision can’t be made because of the lack of mental capacity of a sole trader, partner or director is all too often not part of a business’s strategic risk management. This is despite the fact that ‘after the event’ options for dealing with the loss of mental capacity of a key decision maker in a business are increasingly limited.
It is no longer straightforward, for example, for company directors or shareholders to obtain a court order removing a director who lacks mental capacity. Legislation relating to mental health discrimination and equality protects the rights of directors in this situation. Consequently, regardless of the provisions of its memo and arts, a company’s directors or shareholders will usually have to seek the permission of the Court of Protection to remove an incapacitated director. This is time consuming and can be fraught with procedural difficulties.
If the mental incapacity of a key decision maker results in the inability of a company to constitute a fully quorate board, this can have a paralysing effect on its business, with bills, suppliers and salaries unable to be paid and the company unable to enter into agreements with third parties. The absence of a sole trader or a key partner in a traditional partnership can have a similarly paralysing effect.
It usually takes the Court of Protection in the region of six to seven months to process an application from a third party to be appointed deputy on behalf of an incapacitated person. A decision making vacuum in a business for this length of time can cause its complete collapse. Thus, relying on the ‘after the event’ option in a business context is rarely prudent. Managing the risk with the appointment by key decision makers of attorneys pursuant to Business Lasting Powers of Attorney is increasingly considered to be germane to good corporate governance.
Business attorneys need to have the requisite skill set, knowledge and experience to be able to make decisions that are best for the business. For this reason, the same person will not usually be the best appointment to look after both an individual’s personal finance affairs and their business affairs. It may also be that relevant commercial and regulatory factors contra indicate such combined appointment. Whilst it is possible, therefore, in a single LPA either to appoint the same attorneys to carry out both roles or to split the roles by appointing separate attorneys for business and personal finances, the potential for conflicts of interest and a lack of clarity around the scope of the two discrete roles will usually vitiate the effectives and sometimes even the validity of that LPA. In most circumstances, a separate Business LPA is the most prudent option.
Whether you are a sole trader, a partner in a traditional or limited liability partnership or a company director, you will wish to put in place robust risk management across your business. Carefully drafted business LPAs can significantly enhance your business’s ability to survive the loss of mental capacity of your key decision makers in the same way as a bespoke secure email encryption programme can protect it against cyber threats.