Contingency planning for a director losing capacity

It is easy to think that the loss of mental capacity is something only the elderly need to worry about. In fact it has more far-reaching implications, especially for business owners.

Capacity can be lost in any number of ways. For example before or after routine surgery, as a result of medication or as a result of a dreaded skiing accident. It is unpredictable and like any other commercial unknown it is something that ought to be planned for.

For those running a family business, typically with a small workforce and one or two people with all the knowledge and authority to act on behalf of the company, it is especially important to consider who would run the business day to day if something happened to you? How would you pay your suppliers and fulfil your contracts? Who would be able to access the business bank accounts?  Would you be able to pay your staff?

You may have thought about this and there may be informal understandings in place, but these are not legally watertight. If there isn’t a properly thought-through contingency plan in place the damage and disruption to your business could be huge.  

The first step is to think about Lasting Powers of Attorney (LPAs). Are these in place for key people in the business? An LPA enables you to appoint others (your attorney(s)) to make decisions on your behalf if you no longer have capacity to do so. Unlike a general power of attorney, an LPA endures beyond a loss of capacity and so provides a long-term "insurance policy". 

However, depending on the structure of your business, an LPA alone may not be the answer.

If you are a sole trader, an attorney appointed under an LPA should be able to step into your shoes and continue the business. 

If you are a partner in a partnership, the position will depend on what the partnership agreement (if there is one) says about a partner losing mental capacity. 

If your business is a limited company, then the position can be more complicated. It sometimes comes as a bit of a surprise to find out that an LPA cannot deal with a company director’s loss of capacity. This is because director’s duties are personal and cannot be delegated to an attorney. Where a business has a sole director, this can cause serious problems particularly if the company’s articles do not contain a mechanism for dealing with that scenario. Dealing with the possible loss of capacity should be a key part of any contingency planning – to be thought of alongside overdrafts or keyman insurance. The company’s articles ought to be reviewed and updated to ensure that they cater for a situation where a director loses capacity, such that there is a clear and agreed process in place. More informally, and especially where there is one person at the head of the business with “all of the knowledge”, consider whether a dissemination of information and involvement of more junior directors or employees in day to day strategy and planning decisions is appropriate. Potentially, the head of the business could consider writing confidential “how to” guides, which can be accessed and referred to only in the event that she or he loses capacity overnight. Such guides might help others in the business to navigate key issues, deadlines or relationships in the short-term to preserve the smooth running of the business, until a more permanent solution can be put in place. 

That is the key message here: however big your business, it is essential that mental capacity is not forgotten when making contingency plans. 

If you require further information about anything covered in this briefing, please contact Sonal Shah or Will Cudmore, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2019