What happens when a company director loses mental capacity? Part 2

A director’s loss of mental capacity can create immediate practical and legal difficulties for a company, particularly where the individual is the sole director, a significant shareholder or both.  In the first part of our series, we discussed directors’ responsibilities and termination of a director’s appointment.  In the next part, we discuss what happens if the position is not addressed and what happens if a lasting power of attorney (LPA) is in place.

Disqualification risk if the position is not addressed

A related but distinct risk is director disqualification. The court may make a disqualification order against a person whose conduct in relation to a company, whether alone or together with conduct as a director of other companies, makes them unfit to be concerned in the management of a company. Where a director continues to hold office and to make, or purport to make, board decisions after losing capacity, and the company subsequently becomes insolvent, questions can arise as to whether the board (including any co-directors who allowed this to continue) acted properly. Addressing incapacity promptly, in line with the articles of association and the statutory removal procedure, reduces this risk as well as the practical governance risk already described.

Can an attorney act as a director?

A LPA does not ordinarily allow the attorney to take over the donor’s office as a company director. A directorship is a personal office involving statutory duties and the exercise of the director’s own judgment. Those responsibilities cannot generally be delegated wholesale to an attorney.

A property and financial affairs attorney may be able to deal with matters connected with the director’s personal property, including shares owned by the director. That does not make the attorney a director or permit the attorney to attend board meetings and vote as if holding the office.

Limited delegation may sometimes be permitted for administrative or operational purposes, but the director remains responsible and must retain proper oversight. Where the director lacks capacity to supervise the delegated functions, delegation is unlikely to provide a satisfactory solution.

The position where there are other directors

If the company has other directors, they may be able to continue managing the company, provided the board remains quorate and the articles of association permit them to act. The quorum provisions must be checked before decisions are taken. The remaining directors’ own statutory duties are also engaged in this situation – the duty to promote the success of the company and to exercise reasonable care, skill and diligence may require the board to address the situation promptly, for example by seeking medical evidence, restricting the affected director’s involvement in decisions, or initiating the removal process, rather than allowing management to continue unchanged. Where a co-director is also a family member, or has been appointed attorney or deputy for the affected director, the duty to avoid conflicts of interest should also be considered.

If the number of directors falls below the required quorum, the remaining director or directors may generally act only to appoint further directors or call a general meeting so that the shareholders can appoint directors.

The articles should also be reviewed to establish whether the board has authority to appoint a replacement director. Under the model articles, a director may generally be appointed either by ordinary resolution of the shareholders or by a decision of the directors. Bespoke articles may impose different requirements or confer appointment rights on particular shareholders.

Board decisions made without the required quorum may be invalid and can expose the company to disputes over contracts, banking instructions and other transactions.