February 2004

Important New Powers of Attorney Law for NSW - Commercial and Finance Implications

A power of attorney is a legal document that allows a person (known as the "principal") to appoint another trusted person(s) (known as the "attorney") to attend to important financial and property matters on the principal's behalf. A general power of attorney allows the attorney to do anything the principal could lawfully authorise an attorney to do. An enduring power of attorney is one that is signed by the principal with the intention that it will continue to operate even if the principal should suffer a loss of mental capacity after the document has been signed.

Background

The Powers of Attorney Act 2003 was assented to on 23 October 2003 and is mainly aimed at remedying problems that currently exist in practice with enduring powers of attorney - especially misuse of such powers by unscrupulous attorneys.

The operation of the Act commenced on Monday 16 February 2004. It will result in a new prescribed form of power of attorney and major changes in the law and practice relating to general and enduring powers.

The Act largely re-writes NSW statute law on powers of attorney, although general law principles will also apply. The Act will have some implications in the commercial and finance areas. These will arise because powers of attorney are now likely to contain much tighter restrictions on benefits to attorneys and third parties and on gifts. Financiers and others will need to be aware of these restrictions.

The position of existing powers of attorney signed under the old law

The Powers of Attorney Act 2003 will apply to powers of attorney signed on or after the commencement of the Act. Existing powers of attorney signed under the old law will continue to be effective and the old law will continue to apply to them. Also, some provisions of the new Act will apply to existing powers of attorney.

Prescribed new form of power of attorney

The new prescribed form of general and enduring power of attorney is more detailed than the existing form, and enables a principal to be more specific about the way the principal wants his or her affairs to be managed by the attorney. Notably, the new form clarifies the extent to which an attorney may make a gift, take a benefit or confer a benefit on a third party.

Because of its simplicity, the old prescribed form was widely used. The old form was much simpler and allowed the attorney to provide (theoretically) unlimited benefits to the attorney or third parties. Misuse of such powers was difficult to undo, unless it was clear that the attorney had breached his or her duties.

As a general rule, the prescribed new form of power of attorney prohibits the giving of a gift or the conferral of benefit on the attorney or a third party. This is so unless the attorney is expressly authorised by the principal to give the gift or confer the benefit.

The Act also provides that if a prescribed power of attorney includes a "prescribed expression", this will authorise the attorney to make the kinds of gifts or confer the kinds of benefits specified for that expression. The "prescribed expressions" are therefore shorthand expressions which can be used to incorporate power to confer benefits of the kind more fully set out in the Act.

In summary, they authorise the conferral of benefits only where the benefits relate to expenses incurred by the attorney or third party in respect of housing, food, education, transportation, medical care and medication. The benefits must also be not more than what is reasonable having regard to all the circumstances and, in particular, the principal's financial circumstances and the size of the principal's estate.

The new form also allows a principal to elect when the power of attorney comes into effect (i.e immediately, for a specified period, when the attorney accepts the appointment, etc). The form will also contain some standard important information for principals and attorneys to assist them to better understand the legal implications of a power of attorney.

The new law provides for certain persons to explain, witness and certify enduring powers. One important change to the law is that if an enduring power of attorney is being signed, the attorney must sign the form before it can be used by the attorney. The Act introduces the new concept of a review tribunal with powers to make wide ranging orders where it is apparent that an attorney is not managing the principal's affairs in the best interests of the principal.

Irrevocable powers, registration and proving powers

Irrevocable powers of attorney are useful tools to provide assurance to financiers and others that acts will be done. An irrevocable power of attorney also remains effective notwithstanding that an act is done by the attorney without the concurrence of the principal. The new law continues to provide that powers conferred on the attorney of an irrevocable power of attorney remain effective even if the principal dies, becomes substantially incapacitated or becomes bankrupt or if a company is dissolved.

The registration requirements for powers of attorney continue. The Act clarifies that the requirement to register powers of attorney is limited to certain transactions affecting land. The Act has also re-enacted the old law in relation to the proof of powers of attorney. It provides that a document that is a certified copy of a power of attorney is evidence of the execution and contents of the power of attorney.

Implications in the commercial and finance context

The new legislation does not limit the powers which can be given to an attorney by express words. Generally, it will have little impact on the type of powers of attorney typically given by large corporations, such as banks, to their executives and managers. However, the introduction of the new prescribed power of attorney form, and the generally more limited powers given to attorneys by the form, will be of significance to financiers and others when dealing with attorneys in a business or finance context.

We expect that usage of the new prescribed power of attorney form will be prevalent. In particular, it is anticipated that many powers of attorney will be signed by individuals using the prescribed expressions. These confer significantly less power than was the case under the former prescribed form. Financiers and others dealing with attorneys should be aware of the changes to the law and will need to exercise caution particularly in situations where an attorney is taking a benefit or conferring a benefit on third parties.

To illustrate, consider the example where X is the attorney for a mortgagor in a finance transaction under which some benefit is being conferred on X. X presents a new standard form power of attorney which has the prescribed expressions regarding benefits to the attorney and third parties. In this scenario, the new regime prohibits X from executing documents that would result in a benefit being conferred on him or her as attorney or on any third party unless the power of attorney expressly authorises the conferral of the benefit. The prescribed expression will only preserve the power in so far as it relates to housing, food, education and like expenses. This will be inadequate in most commercial transactions.

Action

  • Be aware of the more complex regime for powers of attorney and specific statutory limitations on benefits to third parties, benefits to attorneys and gifts.
  • If necessary, analyse whether transactions confer such benefits. Advice may be needed as to whether the wording in powers of attorney adequately authorises a transaction.
  • Be aware that attorneys under enduring powers given by individuals must sign their acceptance before the power becomes operative.
  • Check the time of operation of the power.
  • Be aware of the requirements for obtaining proof of the power.
  • Be aware of the requirements for registration of powers of attorney authorising dealings in land.