Commercial Law

Business Owners and Mental Incapacity

March 9, 2020

There are three ways to mess with a good business: by Death, Divorce or Dispute. For business owners these are the dreaded “3D’s”. However, as our population ages we are seeing more business owners continue running their businesses for longer and with that comes the risk of mental incapacity affecting a larger number of them.

For business owners, clarity of thought at all times is essential for the myriad number of decisions that have to be taken on a daily basis. Gradual mental decline is one thing we will all be familiar with and deal with. But the impact of mental incapacity on a business owner, a spouse or partner, as well as employees can be devastating on all fronts.

What can business owners do to mitigate the effects of mental incapacity on their business?

There is some assistance given in the Mental Capacity Act 2005 which essentially sets up a framework of tests to help ascertain whether any individual has the mental capacity to run their affairs and therefore a business.  For company directors who are not sole directors and shareholders the articles of association of the company may give some relief to the remaining directors/shareholders once a determination has been made about the state of a director’s mental health. For sole director/shareholder owners the problem is more involved and could involve another trip to the Court of Protection (with all of the costs and time delays involved).

And what can be done before this doomsday scenario appears?  

In short, business owners can take the proactive step of making a Lasting Power of Attorney (LPA), appointing trusted individuals as co-directors in a company, making shareholder agreements and ensuring the articles of association deal with the problem, as well as making a will.  An LPA allows an individual to appoint others as their attorney to act on their behalf for purposes of both their health and their wealth i.e. for the benefit and administration of their property and finance.

Attorneys, however, cannot act as a company director so the steps referred to above need to be taken by directors as well. Sole traders (and some partners in a business where an agreement is in place permitting the intervention of an attorney) are in a slightly easier position as an attorney can often but not always act in place of the owner/partner.

In short action before the advent of mental incapacity of an individual business owner, partner or director/shareholder can take positive steps to alleviate the burden of mental incapacity by making a Lasting Power of Attorney and making sure a will and properly drawn shareholder and partnership agreements are in place too .

Jarmans Solicitors can advise you and help with the preparation of an LPA and will and indeed shareholder or partnership agreements. Contact Barry Bond tel: 01795 472291 email: bbond@jarmans-solicitors.co.uk