Business continuity planning for Owner/Managers

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With the rapid spread of Covid-19, the Government has rightly told people to stay at home unless one of the four exceptions arise. Hopefully this will slow or even stop the spread of the virus and save thousands of lives.

Among the questions and queries we have received through the Corona Business Advice groups on LinkedIn and Facebook, business owners have asked how their businesses might run without them if the worst were to happen. It’s not a great topic to cover, but very important nonetheless, so we will set out some points to consider here.

Small business owners tend to be sole-traders, partners in partnerships (also LLP members) or shareholders and directors of limited companies. The points set out here will not cover all circumstances but will give you food for thought. As always, you’ll need to take proper legal advice on your particular circumstances.

I am a sole director and sole shareholder of my limited company. What happens if I become incapacitated or die?

Unfortunately, in the event of incapacity, unless you have a Lasting Power of Attorney in place for financial and property matters, there will be nobody with the power or means to run the company as a director, or to appoint directors to run the company in your absence.

In the event of your death, a similar situation would occur unless your Will makes specific provisions dealing with your shares and enabling someone to appoint a director to run the company. Without these in place, it could be some time before the situation is dealt with satisfactorily.

I am a sole director but there are other shareholders

In this case, in addition to the provisions of your Will and/or any Lasting Power of Attorney, it will depend on the articles of association, any shareholder’s agreement and the ability of the shareholders to appoint a director to carry on running the company. This would normally be done by passing an ordinary resolution requiring more than 50% of the shareholders to vote in favour. Please note shareholders have devolved the running of the company to the directors under the articles of association and so the shareholders’ powers to manage the affairs of the company are effectively limited to their ability to pass resolutions at the request of the directors.

We are both the only directors and shareholders of the Company (50/50)

Absent a shareholders’ agreement, provisions in the Wills and/or a Lasting Power of Attorney, unless there are provisions to the contrary in the articles of association, board meetings may not be quorate (one director not being sufficient) and a 50% shareholder cannot pass an ordinary resolution to appoint another director.

Companies with two directors who are also 50/50 shareholders are known as “deadlocked” companies because one director or shareholder cannot make decisions or pass resolutions without the other’s support. It is important to have a shareholders’ agreement in place with a mechanism for breaking the deadlock, or to make provision in the Wills and Lasting Powers of Attorney for both director/shareholders to avoid deadlock leading to stalemate and the demise of the company.

I am one of several Directors of the Company

The Articles should provide for what happens if you become incapacitated. If the Company has adopted unamended Model Articles your position will be terminated if, in the opinion of a medical practitioner, you are physically or mentally incapable of fulfilling your role for more than three months. 

If you are incapacitated in the short term and the Company has adopted unamended Model Articles, you can delegate your powers to an Attorney. Bespoke Articles may also allow you to appoint an alternate director.

I am a Shareholder and there are several other Shareholders

You can appoint an Attorney to vote on your behalf so long as there is an LPA in place giving the Attorney the authority to do so. If you are physically incapacitated rather than mentally (e.g. unconscious in intensive care), you can vote by proxy.

I am in a partnership with several other partners. What happens to the partnership if one of us dies or becomes incapacitated?

The best place to start is the Partnership Agreement, if you have one. A well drafted agreement will provide for what happens in these situations.

If you are uncertain whether the agreement adequately deals with the issue of incapacity or in the absence of any express agreement at all, you should consider making a business LPA. Specialist legal advice should be sought to ensure that the LPA wording is compatible with the terms of any Partnership Agreement.

In the absence of a properly drafted Partnership Agreement or LPA, the incapacity or death of a partner is governed by the Partnership Act 1890.

Where a partner is incapacitated, this may involve an application to the Court to appoint a deputy to act on behalf of the incapacitated partner, or to dissolve the partnership. Both processes are time consuming and expensive, with no certainty of outcome.

If a partner dies, the partnership is automatically dissolved, and the business is wound up. Partnership Agreements usually will exclude this element of the PA 1890 to preserve the continuity of the business.

A well thought out Partnership Agreement and business LPA are essential to any business continuity plan for the COVID 19 outbreak.

What if I am in a two-partner partnership?

By its very nature, a partnership requires two people, and therefore cannot continue with  one partner if the other dies. If there’s no Partnership Agreement, the partnership will automatically dissolve on the death of a partner, and steps will need to be taken to wind up the partnership.

The surviving partner will have to operate as a sole trader, unless there are provisions in the deceased partner’s Will which give the Personal Representatives express authority to run the partnership and enable it to continue. In the absence of specific authority in the Will, the PR can only remain involved in the partnership for the time it takes to realise it to the estate’s advantage. Alternatively, the PRs could sell the deceased’s share in the partnership to a third party which will enable the partnership to continue.

I am a sole trader

As a sole trader, the assets of your business will be dealt with by your executors in accordance with your Will.

Unfortunately, there is no one with the authority to run your business if you become incapacitated. Family members or colleagues will not have the authority to deal with the business bank account without an LPA. This will create serious operational issues such as the payment of salaries and bills. It is absolutely essential to prepare an LPA appointing someone you trust to act on your behalf. It may be the case that a business colleague with the appropriate knowledge and experience is best placed to step into this role. In those circumstances you should consider preparing a Business LPA and appoint a family member under a separate LPA to deal with your personal finances.

An LPA cannot not be drawn up after you have lost mental capacity (including being unconscious in intensive care) so it’s important that you act quickly otherwise an application will have to be made to the Court to appoint a Deputy. This is a slow and expensive process during which time your business cannot operate as normal.

So, what can you do about it?

  1. Review articles of association and any shareholders agreements, taking advice on these. Can you hold board meetings remotely whilst in isolation? How may directors may be appointed or removed? Are alternate directors permitted? Know what can and cannot happen if the worst should happen to a director and make any necessary changes to the articles of association or shareholders agreement so that your business can continue to function.
  2. Look at putting in place Lasting Powers of Attorney for finance and property, allowing your attorney to take actions according to your wishes if you are incapacitated. Even though we are in lockdown, the lawyers who deal with Wills and LPAs are classed as key workers and can get this done for you asap.
  3. Make sure people you trust (your nominated attorney for example) can access login details, passwords, key information, documents and instructions needed to keep the wheels turning in the days and weeks immediately following your incapacitation or death.
  4. If you have not already made a Will you should do so. If you die intestate, any shares you own may not necessarily pass to the family member best suited to own or run the business in the future.

In all cases, the director(s), sole-trader or partners are usually the only people on the bank mandate (for obvious reasons) and so the bank may not be able to take payment instructions or deal with anyone else about the account until someone can be appointed with the authority to act.

Without a proper plan and the necessary powers in place, the business could grind to a halt, unable to function without authority – with devastating consequences for the business and employees.   Having proper contingency measures in place will allow the business to continue to operate, which necessarily involves planning for others to have decision making authority if you are incapacitated.

It’s never a good topic to think about but the current crisis is a reason to give it focus. Seek advice and make a plan so you can rest easy.

If you require further information, please don’t hesitate to contact us. Good health.