May 22 2013

Powers of Attorney

Not as powerful in business as imagined.

A power of attorney allows you to appoint someone (the attorney) to look after your affairs. It’s a common mistake for company directors to think their personal attorneys can look after a company’s affairs in their absence. This article looks what business people should do if they anticipate enforced absences from their company.

You’re a sole director and you plan to be overseas or in hospital. Someone must look after your affairs during your absence. The solution appears deceptively simple: ask your lawyer to draw up a power of attorney which gives someone you trust (the attorney) the authority to act legally on your behalf. You expect that your attorney will be able to wear all the hats you wear. When you own and operate your own company you wear many hats: director, employee and shareholder. On a day-to-day basis these distinctions don’t affect how you conduct your company’s affairs. It’s your business. It’s your livelihood. It’s personal. So it’s a common mistake for company directors to think their personal attorneys can look after their company’s affairs while they’re away. The following example should unravel the confusion.

The business scenario

Imagine you have a friend who needs surgery and appoints you as her attorney to look after her affairs during her recovery. Your friend is also the director of a publicly listed company. If your instincts serve you well, you wouldn’t assume you could attend the next company board meeting and vote on important strategic and financial decisions. Your instincts tell you that those sorts of company directors are voted onto a company’s board by shareholders because of their personal attributes: acumen, experience, personality and expertise. The law reflects these understandings and applies them to all companies: big or small. The law does this because, as a general rule, those who have legal obligations of a personal nature should not delegate their duties to an attorney. Your intuition also tells you that your attendance at a board meeting would be unfair to shareholders. The law also reflects this instinctive need to protect shareholders. The purpose of a limited liability company is to give shareholders (i.e. investors) a limit on their liability (equal to the price for their shares) should things go wrong while giving them a fair degree of influence over their investment. For example, they choose the directors and the directors cannot allow the company to enter into major transactions or alter shareholders’ rights without sufficient shareholder approval. This balance works because the law treats a company, for business purposes, as if it was a real person. The shareholders own it and the directors are responsible for the day to day management.

The SME model

This will all seem rather artificial if you’re the sole director and principal shareholder of a smaller company. But if you enjoy the benefits of trading through a limited liability company it’s important to acknowledge all the nuances that come with it.

So if you’re a sole director and you plan to be overseas or in hospital, your company will need to appoint someone (or another company) to look after your company’s affairs during your absence. It’s an important nuance but it’s a straight forward solution allowed by the Companies Act. If a company appoints an attorney its powers, as a company, are delegated as if the company were a real person. And like a real person, your company can grant:

  • A general power of attorney that allows the attorney to look after all the company’s money and property, or
  • A specific power of attorney that allows the attorney to manage specific matters or transactions (such as the leasing of a property).

Again, this solution appears deceptively simple. The company’s attorney will be able to conduct the company’s affairs as if the attorney has the director’s approval. And if the company’s actions suggest a breach of the director’s duties to the shareholders or creditors the director may be held responsible. So it’s important to appoint an attorney you can trust.

It’s also vital to talk with us about the nuances of company law.