If a business owner loses mental capacity, the effect depends on the legal structure, governing documents, bank mandates and whether a valid property and financial affairs lasting power of attorney (LPA) is already in place. Accounts do not automatically freeze and every company does not automatically stop trading, but a sole-owner business can face serious problems if nobody has authority to act.
This article focuses on England and Wales.
Why capacity is different from death
When someone dies, their estate passes to personal representatives. Incapacity is different: the person remains alive and continues to own their assets and shares.
Capacity is decision-specific under the Mental Capacity Act 2005. Someone may be able to make routine decisions but lack capacity for a complex refinancing or share transaction. Diagnosis alone does not establish incapacity, a point our note on appointing executors and trustees where there is an Alzheimer’s diagnosis also explores.
Where no appropriate LPA or other authority exists, an application to the Court of Protection may be needed for a deputyship or a specific decision. Property and financial affairs applications require evidence of capacity, notification and court review, and current court fees also apply.
What happens by structure
| Structure | What can happen without planning | What to consider |
|---|---|---|
| Sole trader | The owner may no longer be able to operate accounts, sign contracts or make financial decisions | Property and financial affairs LPA covering business matters |
| Sole director and shareholder | The company can become unable to act if the director ceases office and nobody can exercise shareholder powers to appoint a replacement | Review the articles, consider another director and a business LPA |
| Company with several directors | Other directors may continue if the board remains quorate | Articles and shareholders’ agreement with incapacity provisions |
| Partnership without an agreement | Permanent incapacity can allow another partner to ask the court to dissolve the partnership | Written agreement covering incapacity and exit |
| LLP | The LLP agreement should govern decision-making and retirement | Suitable incapacity provisions |
For private companies using the current model articles, article 18(d) says a director ceases office if a treating registered medical practitioner gives the company a written opinion that they are physically or mentally incapable of acting and may remain so for more than three months. Bespoke articles may differ.
A business LPA does not automatically turn an attorney into a company director. Directorship is a personal office. Depending on the LPA and constitution, an attorney may exercise the donor’s shareholder rights, including rights relevant to appointing a replacement director.
Two LPAs can be appropriate
The Office of the Public Guardian recognises that a person may make two property and financial affairs LPAs: one for personal finances and another for business affairs. The instructions should prevent overlap or conflict.
The government’s power of attorney pages explain the general rules. An LPA must be registered before it can be used; GOV.UK says registration normally takes 8 to 10 weeks if there are no mistakes. Our page on joint lasting power of attorney arrangements explains options where more than one attorney is appointed.
Bank mandates and company documents still need checking. An LPA cannot cure every governance problem.
The partnership problem
Section 35 of the Partnership Act 1890 allows the court, on a partner’s application, to dissolve a partnership where another partner becomes permanently incapable of performing their part of the partnership contract. Dissolution is not automatic.
A written agreement can instead provide for incapacity, retirement, valuation and payment for the outgoing interest.
The knock-on effects people forget
Incapacity does not by itself cancel a personal guarantee. Enforceability depends on the guarantee and surrounding facts; our post on when a guarantee can be challenged explains relevant issues.
Commercial property deadlines also continue. Our commercial lease solicitors in London can advise on renewals, rent reviews and break notices. Landlords should also keep records in line with documenting rent arrears properly. Where possession is required, see our landlord and tenant eviction services, while tenant-condition claims are covered by our housing disrepair solicitors in London.
If incapacity triggers an ownership dispute, preserve evidence. Our guide on building a file that stands up in court, our explanation of how civil claims are allocated between tracks and our note on recent court and tribunal fee changes may be useful if litigation follows.
For succession after death, see life interest trusts in wills and our probate solicitors in London.
Frequently asked questions
Can a spouse take over the business automatically?
No. Marriage alone does not authorise a spouse to manage another person’s sole business, exercise shareholder rights or act as a director. If there is no valid authority and the owner lacks capacity, Court of Protection involvement may be required.
How long does a deputyship application take?
There is no guaranteed four-to-six-month timeframe in current GOV.UK guidance. Applications require capacity evidence, notifications and court review, and additional information, a security bond or a hearing may sometimes be required.
Does a director automatically lose their position on incapacity?
Not simply because of a diagnosis. Under the current model articles, article 18(d) applies only when a treating registered medical practitioner gives the required written opinion. Bespoke articles may differ.
Can an attorney run the business day to day?
For a sole trader, a properly drafted property and financial affairs LPA can give broad business authority. For a company, shareholder powers must be distinguished from the director’s personal office and fit the constitution.
Put the paperwork in place while you still can
An LPA can only be made while the donor has mental capacity to make it. Review the articles, shareholders’ agreement, partnership or LLP agreement, bank mandates and existing LPAs before a crisis.
Send us your documents and we can identify the gaps and next steps. Speak to our solicitors in North London on 020 3581 9293 or email info@atalawsolicitors.com.