A critical event can happen to anyone of any age. The effects of failing to plan can have dire consequences, and the following case study is based on actual events.
David is 47, living with his partner, Sarah, and two children under 18. He runs two successful companies of which he is the majority shareholder with his friend and colleague, the minority shareholder. They are both directors. The success of the companies relies on the expertise and ingenuity of David's personal skills.
David is taken ill with appendicitis and during the operation he suffers a catastrophic stroke. Legally and medically he is judged to be unable to manage his affairs now or in the future. In the absence of a Power of Attorney his business partner applies to the Court of Protection to run all his financial affairs and so does Sarah. After a litigious hearing at the Court of Protection, the Court decides that neither should be appointed and instead appoints a professional Deputy.
As all the bank accounts in the companies required both David and his fellow shareholder's signature an urgent application is made to the Court adding further costs to enable an interim Deputy to exercise powers over the bank accounts. However, the Court limits the powers of the interim Deputy, requiring decisions of certain levels to be approved by the Court. This is extremely cumbersome and with the loss of David's expertise and skills, the companies are placed in an extremely prejudicial position.
Furthermore, the only agreement that they have between them concerning the companies and their shareholdings is a homemade agreement, drawn up between them, when they set up the companies fifteen years ago with £100. At the time of David's stroke the companies are each worth in excess of £5 million. Further litigation ensues over the 'shareholder's agreement' and David's estate suffers both huge legal costs and diminishing returns on his company assets, the fellow shareholder having determined to leave and set up his own company.
Meanwhile, Sarah is trying to look after a family and children at the time of high stress exacerbated by the lengthy and costly litigation. The family's affairs are administered by an anonymous Court in London, together with a Solicitor as a professional Deputy.
Powers of Attorney
David should have made prior to 30 September 2007 an Enduring Power of Attorney (or now a Lasting Power of Attorney for Property and Financial Affairs) when he created his company. David should have chosen as his attorneys, both for his personal affairs and his business affairs, people who he believed he could trust. The attorneys would have been immediately able on the day of his stroke to put in place all steps to continue to run the business. There would have been immediate access to funds since the attorney acting for David, as the majority shareholder, would have been able to appoint a director.
Had David entered into a Lasting Power of Attorney for Health and Welfare, then this could have appointed Sarah as attorney. She would then be able to make decisions as to his welfare and his care. Instead, as she has no status, she had to make another application to the Court of Protection to be appointed as a Welfare Deputy. This has placed limits on her powers and requires her to return to the Court of Protection to make certain decisions for and on David's behalf.
Permanent health protection
At the time of setting up the company David should have been advised through his financial advisors or his professional advisors to consider and take out permanent health protection. David was in effect self-employed and without any continuing or limited income; his family are now in a precarious position.
Shareholder's agreement
A proper and legal shareholder's agreement should have been drawn up at the outset of the venture between the two parties, which might have averted heavy litigation. This would have addressed some of the issues omitted in the homemade agreement, for example, setting out a mediation process.
Conclusion
It is extremely important that comprehensive advice is sought by shareholders and sole traders in respect of their unexpected death. Quite apart from the issues above, lack of Wills, lack of cross option agreements and lack of key man insurance, all give rise to considerable difficulties for those left behind trying to manage the companies, businesses or the families themselves.
The contents of this brochure are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.
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