Have you ever wondered what happens to your business if you or a fellow director/partner becomes incapacitated through illness or an accident? Surely there is something in your business' governing documents or a legislative provision that covers this? Right? Recent legislative changes have determined that, in short, the answer is no. The Mental Health (Discrimination) Act 2013 widens the definitions within the Equality Act 2010 to extend its provisions to mental health. Previously, a director was capable of being removed from their role and a replacement appointed by the order of the court in the event that they became unable to carry out their role as a result of mental illness. Now however, in the eyes of the law, mental incapacity alone is an insufficient ground to remove the director, and therefore the decision making powers of the business remain unaffected.
What does this mean if a director is unable to carry out their required tasks? Can contracts be entered into with suppliers? Can wages be paid to employees? Might the business simply cease to function?
Recent statistics show that 1 in 6 people will take time off work for stress and/or anxiety. The Alzheimer's Society also estimated that by the end of 2015 there would be 850,000 people with dementia in the UK, of which 40,000 would be 'younger people'. Yet the implementation of the Mental Health (Discrimination) Act 2013 means that mentally unwell directors cannot now be removed by a court order as mental health is a protected characteristic for the purposes of equality legislation.
What can you put in place therefore to ensure that your business is protected against this? It is highly recommended that any business owner, whether they are a sole trader, a partner in a partnership or the director of a private company, should enter into a Commercial Lasting Power of Attorney (LPA).
Many people will have heard of Lasting Powers of Attorney (LPA's) as they have become more commonplace for people to enter into in recent years in relation to their property and financial affairs and their personal health and welfare considerations. A Lasting Powers of Attorney (LPA) is a legal document that enables an individual with mental capacity who is over the age of 18 to choose another individual or individuals to make decisions on their behalf. Commercial LPA's follow this approach, specifically in relation to decisions regarding the individual's business and their business assets. Whilst a property and financial affairs LPA would extend to business decisions, generally the person entrusted with personal decisions would not be the person entrusted to take over the running of a business. It is important therefore to consider having both of these LPA's in place to ensure that the powers are split. The Commercial LPA essentially acts as a form of business continuity insurance which provides for a person specifically appointed by the director in the event of their incapacity to have authority to run the business on their behalf (i.e. undertaking essential tasks such as authorising cheques, entering contracts, purchasing supplies and paying employees' wages). Without this security, cheques could go unpaid, contracts may be lost, stock could be unobtainable and the business could suffer irreparable damage. In this scenario, the business will struggle to continue to exist for very long. The biggest frustration in all of this is how easily avoidable it is with the use of a Commercial LPA.
When will it apply?
An attorney must act in the best interests of the donor of the powers and must follow the Mental Capacity Act Code of Practice. A Lasting Powers of Attorney (LPA) can be utilised when it is 'needed' and can be specified and restricted by your instructions to your attorneys within the LPA itself; from total loss of mental capacity, to an injury which makes it impossible for the individual to carry out a specific task and take care of their affairs protected by the in-built safeguards in the Mental Capacity Act 2005.
Who should I appoint?
Parliament has provided guidance on who should be considered to be appointed as your attorney in the event of your incapacitation. The Mental Capacity Act 2005 Code of Practice states at paragraph 7.8 that:
A donor should think carefully before choosing someone to be their attorney. An attorney should be someone who is trustworthy, competent and reliable. They should have the skills and ability to carry out the necessary tasks.
It is important therefore to consider this in detail before appointing attorneys. If you work in a regulated field then your attorney would need the requisite qualifications and certification for someone in that sector. It is a decision that should not be rushed and considerable thought as to who is appropriate should be given from the outset.
When entering into a document such as a Lasting Powers of Attorney (LPA), you may hope to never have to use it, but if you do suffer with a stroke, heart attack or instance of mental incapacity, it is invaluable.
At Clapham & Collinge we have a dedicated team of experts who are able to provide you with all of the necessary information, support and legal advice on Commercial Lasting Powers of Attorney and how they can be utilised for your business needs. For more information, contact us on 01603 693500 or email us using the 'Make an enquiry' form.