What happens when a company director loses mental capacity?

This article was co-authored by Private Client Partner Amy Lane and Corporate and Commercial Partner Elle Berrett.

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. The outcome depends on the company’s articles of association, the availability of other directors and shareholders, and whether the director has made a lasting power of attorney (LPA).

Mental capacity is not necessarily an all-or-nothing condition. Under the Mental Capacity Act 2005, capacity is assessed in relation to the particular decision at the time it must be made. A director may therefore be capable of making some decisions but not others, and capacity may fluctuate. A diagnosis of dementia or another medical condition does not, by itself, establish that the director lacks capacity.

Capacity to act as a director

Directors are responsible for managing the company and must exercise their own judgment. Their statutory duties under the Companies Act 2006 include promoting the success of the company, exercising reasonable care, skill and diligence, avoiding conflicts of interest and acting within their powers.

A director who cannot understand, retain, use or weigh the information relevant to a particular board decision, or communicate a decision, may lack capacity to participate in that decision. Appropriate support should be considered before concluding that the director lacks capacity. Depending on the circumstances, this could include providing information in a simpler form, allowing additional time or holding the meeting at a time when the director’s condition is more stable.

Loss of capacity does not necessarily cause a director’s appointment to end automatically. The company must examine its articles of association and any relevant shareholders’ agreement or service agreement.

Termination of a director’s appointment

Many companies incorporated under the Companies Act 2006 use the model articles for private companies limited by shares. Model article 18 provides for a person to cease being a director in specified circumstances. These include a situation in which a registered medical practitioner who is treating the director gives a written opinion to the company stating that the director has become physically or mentally incapable of acting as a director and may remain so for more than three months.

The precise wording of the company’s articles of association must be checked. A company may have amended the model articles, adopted bespoke articles of association or retained articles of association based on an earlier statutory form. Older articles of association may deal with incapacity differently, and some articles of association contain no effective mechanism for terminating the appointment on this ground.

Where the relevant provision applies, the required medical opinion and procedural steps should be documented carefully. The company should also handle medical information confidentially and comply with data protection and equality law. Capacity should not be assumed to be absent merely because of age, illness or disability.

If the articles of association do not permit the termination of a director’s appointment, the shareholders may be able to remove the director under a lengthy and complex process pursuant to section 168 of the Companies Act 2006 by ordinary resolution. This statutory procedure requires special notice and gives the director a right to make written representations and to be heard at the meeting. The written resolution procedure cannot be used to remove a director under section 168.

Removal may also have consequences under a director’s service agreement, shareholders’ agreement or employment contract. Ending the corporate office of director does not automatically terminate employment, and termination of employment does not necessarily end the directorship. Contractual claims, including claims arising from wrongful dismissal or breach of a shareholders’ agreement, may therefore need to be considered separately.

Once a director has ceased to hold office, the company must notify Companies House within the applicable filing period and update its statutory registers. Depending on the circumstances, other filings may also be required, including an updated confirmation statement reflecting changes in officers or shareholdings, notice of the resolution removing a director where section 168 has been used, and, where relevant, updates to the register of members or the register of people with significant control.