Business LPAs and your company: what the Model Articles do and don’t allow
Most individuals will be familiar with the two types of Lasting Powers of Attorney (LPA) used in lifetime planning:
- Property and financial affairs; and
- Health and welfare
The above LPAs allow individuals to appoint an attorney to act on their behalf and manage their personal affairs should they lose mental capacity in the future.
In a business context, business owners are increasingly considering another type of LPA (often referred to as a business LPA) as part of their continuity planning. A business LPA can appoint attorneys specifically for business purposes with the intention that they step in and manage the donor’s business affairs in the event that the donor loses mental capacity.
On the face of it, this seems like a straightforward safeguard – but there is a key issue that is often overlooked.
What is often overlooked?
A business LPA does not automatically enable someone to run a company.
There is a common assumption that if a director loses capacity their attorney can simply step in and take over. In practice, this is not usually the case.
Under Model Articles, directors are responsible for running the business and decisions are taken at board level – not individually. A director’s appointment is personal to that individual and cannot be exercised by an attorney. An attorney therefore cannot assume the role of director unless expressly permitted by the company’s constitutional documents – which is something that the Model Articles do not provide for.
What do the Model Articles allow?
Although the Model Articles do not enable an attorney to act as a director, they do contain two relevant provisions:
- Cessation of office: a director may cease to hold office where a registered medical practitioner provides a written opinion that the director is physically or mentally incapable of acting and is likely to remain so for more than three months.
- Delegation of powers: the board may delegate its powers (including by way of a power of attorney). However, this must be done by the board acting collectively to appoint an attorney to act on behalf of the company, and not on an individual director’s behalf.
This means any delegation arrangements must be put in place in advance while the board remains properly constituted and capable of acting. This is often a gap that is only identified once capacity has already been lost.
Whilst the Model Articles can be amended to permit the appointment of alternate directors, allowing a director to nominate an individual to attend and act at board meetings in their absence, the appointment is dependent on the appointing director’s position and will automatically terminate if that director ceases to hold office. It therefore does not provide a solution where a director loses capacity.
What role does a business LPA actually play?
In this framework, a business LPA is generally most effective at shareholder level, rather than at board level.
An attorney may be able to:
- exercise the individual’s shareholder rights (for example, voting on resolutions);
- receive company information; and
- approve decisions such as the appointment or removal of directors.
However, they cannot run the business or participate in board decision-making under the Model Articles.
Why does this matter?
If a director loses capacity, companies can quickly face issues such as:
- inability to satisfy board quorum requirements;
- delayed or blocked decisions; and
- no clear authority to act.
This issue commonly arises in owner-managed businesses, where business continuity planning and corporate governance are not always aligned.
Conclusion
A business LPA can be a valuable tool in business continuity planning but it does not replace the company’s corporate governance framework. Without appropriate provisions in the company’s articles, a business LPA may have limited practical effect at the point it is needed most so careful consideration must be taken on a case-by-case basis as to whether a business LPA will have the desired effect.
A proactive review of the company’s constitutional arrangements alongside any LPA planning is therefore essential to ensure effective continuity in the event of incapacity and to ensure that there are no potential conflicts caused.
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