Lasting Powers of Attorney: practical pitfalls – part 2: business interests
Lots of people know what a Lasting Power of Attorney (LPA) is and how it can help, especially in the sad but increasingly common scenario whereby a friend or family member has lost capacity to understand and make their own decisions. But people who are appointed as attorneys often find that they have a number of challenges to deal with – including the fact that an LPA might not do what people assume it does.
Part one of our 'practical pitfalls' blog considered what sort of obstacles you might need to overcome in using LPAs, including how to get financial organisations to accept them, whether you can use them to make gifts and how you can use them to manage other people's investments . Part two considers how you can use an LPA to assist with the donor's business interests.
It is increasingly common for someone to want to entrust their attorney with their business dealings, perhaps if they are a company director or in a partnership. In fact, people in business are often advised to enter into powers of attorney, particularly if they spend long periods of time abroad. Having someone who is able to sign documents or carry out vital tasks on your behalf can save a lot of time and money, and an LPA might be a good way to achieve this, particularly if you are a sole trader. People also might use a Power of Attorney for a specific reason – perhaps if they are selling a property but are also travelling a lot. In order to sign all of the documents without delay, a simple Power of Attorney can be drafted which empowers someone else to deal with the sale on your behalf.
However, anyone who is thinking about using an LPA to deal with their business interests needs to think carefully about exactly what tasks and powers they want to entrust to their attorney. An LPA might well be sufficient to deal with day-to-day business administration, like collecting in or paying invoices, dealing with stock or arranging for delivery of goods. However, you cannot necessarily use an LPA to deal with all of a donor's business interests.
It is likely that there would be difficulties if an attorney acting under an LPA wanted to act in place of the donor in their capacity as director of a limited company. This is because the role of director is personal to the director and cannot be delegated to an attorney. In addition, company legislation is often drafted so as to not take account of a director losing capacity – meaning that they could still be held personally liable for acts carried out by any attorney, even though they may have had no understanding of this.
There is also arguably a conflict as to whose best duties the attorney is acting in if they are acting on behalf of the director: an LPA requires that the attorney act in the best interests of the donor, but company law requires that a director acts in the best interests of a company. What are the best interests of the company might not be the best interests of the donor and in that case the attorney may find themselves in difficulties. In addition, it is often the case that a company's Articles of Association will provide that the office of director is automatically vacated if the holder loses capacity. In that event, a power of attorney would not be of any help.
Directors should therefore consider what would happen in the event that they lose capacity and are unable to deal with their business interests. This may include amendment of the company's Articles of Association to set out a procedure to cover this or considering the appointment of additional directors in good time who could carry on the business in place of the donor. This would be particularly important if the director is a sole director. In the event that a sole director loses capacity, there may be great difficulties in establishing how the business could carry on – and this could be financially very difficult for their wider family or any employees.
If the business is a partnership, the partnership agreement will need to be reviewed to see if there are any restrictions on having an attorney act. If there is no partnership agreement, the Partnership Act 1890 applies. This allows a partner to apply to Court for an order that the partnership was dissolved on the date that one partner became incapable of performing his part of the partnership contract. Again, dissolution of the partnership might cause real financial difficulties for many people connected to it and may not be the best way forward. A formal partnership agreement should be put in place to combat this eventuality.
An LPA will also not allow an attorney to act on behalf of the donor if the donor was a trustee. This is because a trustee's responsibilities to the trust can only be delegated by a special power of attorney in accordance with the Trustee Act 1925. This should be considered when setting up trusts. In particular, it is advisable for the Deed of Settlement of the trust to set out a clear procedure for how and when trustees can act, including what to do if a trustee loses capacity.
If you would like to discuss making an LPA or if you are the donor or attorney of an existing LPA and would like guidance on how it works, please contact Laura Harper, Sophie Cisler or another member of the Succession and tax team.