Power of Attorney (PoA) is the legal authorisation to represent or act on another’s behalf. While most people are somewhat familiar with domestic PoA, there are many situations where it is beneficial to appoint a PoA in a commercial or business setting too.
Commercial PoA is normally appointed by a company director, allowing another person or persons to carry out responsibilities on their behalf, and can be highly customisable to fit the needs of the business or organisation.
If a director or shareholder in Scotland loses capacity without a commercial PoA in place, several legal and operational challenges can arise.
Incapacitated directors
Firstly, a director who loses capacity cannot perform their legal and fiduciary duties. This includes participating in board meetings, making decisions, and signing documents. A company’s articles of association (its governing document) typically contain provisions for dealing with the incapacity of a director. This usually includes the procedures for appointing a replacement, or temporarily transferring the incapacitated director’s responsibilities to somebody else.
In some cases, the articles of association or company bylaws might stipulate that a director who becomes incapacitated is automatically disqualified or removed from their position. This varies from company to company, and must be checked against specific governing documents.
If the articles of association do not provide a clear mechanism, the company – or interested parties – may need to apply to the Court of Session for an order to remove the director.
Operational implications
In addition to these legal ramifications, losing a director also impacts the running of the business. For instance, if they typically play a key role in the company’s operations or governance, their absence will cause delays to vital decision-making processes. Plus, if the incapacitated director’s presence is required for a quorum, their inability to participate might disrupt board meetings – and hinder the company’s ability to conduct business.
Furthermore, if the director is a signatory on bank accounts or legal documents, their incapacity can cause delays in financial transactions and legal processes until a replacement is appointed.
Sidelined shareholders
A shareholder who loses capacity cannot manage their shares or exercise their voting rights. This includes participating in shareholder meetings, voting on resolutions, or making decisions regarding their shares.
If there is no business PoA or other form of legal authorisation, family members or other interested parties might need to apply to the court for a guardianship or intervention order under the Adults with Incapacity (Scotland) Act 2000. Such an order is required to manage the incapacitated shareholder’s affairs.
On a similar note, the process for transferring an incapacitated shareholder’s shares may be complicated if no provisions are in place. Again, the articles of association or shareholders’ agreement may outline any specific procedures for handling such situations.
From an operational perspective, the incapacity of a significant shareholder can impact the outcome of important votes, potentially affecting the company’s governance and strategic decisions. Dividends and other distributions to the incapacitated individual may also be delayed, or require court approval before they can be accessed or managed on their behalf.
Mitigating measures
If a company has multiple directors, and there is a practice that one or more are always at work, then there may not be an immediate issue. However, if the directors are married, or domestic as well as business partners, so therefore may be absent at the same time (such as being on holiday together), the problem is evident.
Be aware that it is not enough to give one of the managers internal permission, either verbally or in writing. The PoA is what third parties – including customers, HMRC, suppliers, regulators and other important bodies – will rely on. They need a formal patent documented authority to be confident of making the company bound by a contract, a finding, or an order.
Personal familiarity and regular informal interaction may not stand up in court in the event of a dispute. Moreover, a company may offer the defence that it is not liable for the money or obligation because nobody with full contractual authority signed off on the deal or action. The other party will realise this and only agree to do business with relevant sign-off.
As a result, a company may miss out on a deal or a job if there is no-one in the workplace to secure a booking, or the other party wants to know if the directors have accepted and agreed on a specification or price.
To avoid such complications, directors and shareholders can set up a commercial PoA, designating a trusted individual to manage their business affairs in the event of incapacity. A power of attorney is not expensive or complicated to get drafted and signed up. Indeed, a single document can appoint several alternative people, providing each (trusted and competent) manager or executive with the plenipotentiary powers jointly between them.
Addressing the incapacity of a director or shareholder without a business PoA in Scotland involves relying on existing company governance documents and, if necessary, seeking legal intervention to ensure that the business can continue to operate smoothly.
Of course, companies and individuals should seek professional legal advice to ensure they are prepared for any eventualities and to understand their rights and obligations under Scottish law. Plus, a solicitor can offer guidance on setting up a commercial PoA, ensuring businesses are suitably prepared for any unfortunate or unexpected circumstances.
—————————————————————————————————————————
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
