Paul Short asks 'What are your contingency arrangements?'

Paul Short Accountant EssexI often challenge my clients at the end of a meeting by asking them what contingency arrangements they have if something went wrong.  The scenario might be the business is going well but then the client is suddenly incapacitated, which could either be mental or physical (an accident, stroke or heart attack, or just an operation which makes them incommunicado for several months).

How would they and the business cope with this?

I focus on the business but I should probably focus on their personal financial position as well and ask the same question in relation to that.

There are particular situations to which some thought should be directed:

 1.      A Sole Director of a Company

I normally advise that there should be a signed consent form lodged with a solicitor so that another director can be appointed in the event of the sole director being incapacitated.  That is another reason why one should probably have a second person involved right from the start, either as a director or at least as a company secretary with some influence.

2.      Bank

The position should probably be checked with the bank on how they would respond to a period of incapacity.

If one becomes mentally incapacitated or physically incapacitated, there is a risk that the account might be frozen if there is just a sole signatory.  There is a problem too if it is a joint account requiring both signatures to sign.

 It is worth checking exactly how the bank might be respond and then make sure that the position is covered.

Whilst it can be sensible to have both parties signing where there are two parties involved in the business, it can cause a problem if one party is out of action for a while.  It perhaps is sensible to have a certain level of spend, below which either party is empowered to make the payment.

We still seem to think in terms of cheques but with most transfers being electronic, the implications of this have to be thought through. 

3.      Shareholder Agreement

I always advise companies, particularly when they have become established and are starting to generate a value, to have a shareholders agreement in place.

Most shareholders agreements are based on the Table A terms set out in the 2006 Companies House.  Table A stipulates that a director’s office will be automatically vacated if a director is of unsound mind and either:

  • They are admitted to a hospital for treatment under the relevant legislation.  Or
  • A Court Order is made relating to their mental disorder for their detention or the appointment of a person to manage their property or affairs.

The model articles for companies incorporated before 28th April 2013 included similar provisions for the automatic termination of a director’s appointment where:

  • A doctor certifies that they are incapable (physically or mentally) of acting as a director and may remain so for more than three months.  Or
  • A court order is made for the contact of the director’s affairs on their behalf due to their mental incapacity.

The reference to terminating a director’s appointment automatically where a Court Order has been made for mental health reasons has been removed from the model articles for companies incorporated on or after 28th April 2013, in order to comply with the Mental Health (Discrimination) Act 2013.

Accordingly a company will now have to assess whether, taking all of the circumstances into account, a director should leave office or not, and/or rely on a director’s certificate.

It does mean that a clause in any shareholders agreement prior to 28th April 2013 may now be unenforceable because of the Mental Health Act (Discrimination) 2013.

The above points might apply equally to a partnership as well where there might traditionally be a clause removing a partner if they become of unsound mind.

4.      Personal Finance

I should also probably just check that my clients have their personal finances in hand.  Quite often control of the family finances can be in the hands of one of the parties.  If something happens to them, the other party may not be able to get access to the bank account with all the problems that ensue from this.

My conclusion is that I need to be more penetrating and specific in my questions and I should be asking my client to consider:

1.      A Lasting Business Power of Attorney

Should there be provision for a trusted business partner or other party to come in and look after the interests of the incapacitated party.  This can avoid difficulties in a larger partnership or limited company but it can also mean the difference between collapse and survival for the smaller business.

2.      Review or Establish a Shareholders Agreement

Normally Shareholders Agreements provide for a range of decisions to require unanimous approval or a significant majority in order to be passed.  The incapacity of a shareholder might render the company incapable of taking a decision on which the successful survival of the business might depend.

3.      Review Personal Financial Arrangements

It may be sensible to have an Enduring Power of Attorney in place both for financial and for care purposes.  There is often a focus on having insurance in place, both on a business and on a personal footing, if somebody is incapacitated.  There may be a key man policy in place or an income protection policy.  Perhaps now, with mental health much more sharply in focus and more recognisable, we need to consider the impact on this on a business client.

4.      Execution

Consult your tried and trusted lawyer to identify and remedy any exposure.  In terms of Business, Lasting Power of Attorney, there is also a local specialist in this field we can refer you to, if your Solicitor does not have the expertise.

June 2017

Disclaimer

The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

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