How A Loss Of Capacity Can Affect Partnerships & Companies

In life, there are no certainties and a loss of mental capacity is something that you would not ordinarily expect to happen. However, whilst this is something that predominantly affects the elderly and is associated with certain health conditions (dementia and Alzheimer’s, for example), younger, working people can also be placed in this unfortunate position including partners in firms.

This can be particularly problematic for their existing business partners as they will need to make many day-to-day decisions to keep the business running and the best remedy in this scenario is prevention.

Preventative measures to deal with the loss of capacity in a partnership

There are two ways of doing this – the first is by ensuring the partnership agreement provides a solution to an individual partner losing capacity. The second is for each individual partner to have an appropriate Power of Attorney.

A standard or General Power of Attorney can be made so that another can make decisions when the donor is sick, on holiday or occupied. However, the legal authority from these documents will cease when the donor loses mental capacity and those close to the affected partner would have to apply to the Court of Protection for a deputyship order in such a circumstance. This application is not something that can be dealt with very quickly and it may take 12-18 months to obtain a deputyship order, during which time a partnership can quickly run into trouble.

When someone suffers a loss of mental capacity and is unable to deal with their property and finances, a Lasting Power of Attorney (LPA) acts as an insurance document, giving power to chosen attorneys to take over and make those decisions for the donor. This ensures that the partner who has lost capacity can still be “active” when they need to be, albeit through a nominated third party. With or without an LPA, there are clauses that can be inserted into a partnership agreement to ensure that the remaining partners can continue to make certain decisions without the partner who has suffered a loss of capacity.

It is essential that these preventative steps are taken. A business partner who loses mental capacity and does not have an appropriate LPA for property and finances will have their bank accounts frozen and not be able to enter into any contracts.

What about company directors?

A similar approach can and should be taken by company directors. As many directors will know, the articles of association govern the way in which a company operates and these should include clauses that deal with the unfortunate situation of a director losing capacity so that the director in question does not become an unfortunate roadblock to decisions being made by the company.

The Companies Act 2006 (Act) provides model articles of association when setting up a new company. Unless bespoke articles of association were used, Art 18 of those model articles provides that:

The Act, therefore, provides an exit plan and allows the directors or shareholders to appoint a new director in the event that a quorum can’t be fulfilled for a meeting to go ahead. If, however, a sole director is also the sole shareholder and loses mental capacity, then this is not possible and sole directors are strongly advised to execute an LPA. This way, their attorney can either step into their shoes or appoint a new director. With no LPA, an application for a deputyship order will need to be made to the Court of Protection.

Some directors or partners may have existing LPAs, created with the intention of appointing their spouse or family to look after their personal property and financial affairs. However, these personal appointments may not be the most appropriate for the directors of a business. Spouses and family members are unlikely to be qualified or have the relevant experience to be able to make sound business decisions on behalf of the protected party. The other partners of the business may also not want an outsider to come in and make decisions, especially if the business has trade secrets and other confidential aspects. Directorships are personal appointments and a general LPA for property and financial affairs may not allow an attorney to make company decisions.