Business owners and loss of capacity: considerations

Once a director has been deemed to lack capacity, the company is likely to seek to remove the director. Our earlier article discussed the manner in which a removal is carried out by virtue of the Companies’ Articles of Association. In this article, we consider a director’s removal in further detail as well as some practical considerations.

What happens if the board meeting is inquorate?

A company may be in a position where the incapacity of one director prevents a board meeting being quorate, in which case a record of the termination of the officer cannot be made internally and external records accordingly cannot be updated. Article 11 sets out how the company would continue to function in such a situation. It allows inquorate meetings to appoint a new director or call a general meeting so that shareholders can appoint a director. However, the general meeting must be at the instigation of the board of directors.

Sole directors

In cases where the sole director loses capacity, the shareholders will need to apply to the Court under S.306 Companies Act 2006 for an Order that a meeting be held at which resolutions are proposed to appoint directors or change the Articles.

If the incapacitated sole director was the sole shareholder of the company, the power to make a section 306 application will vest with the director’s Attorney or Deputy, if one has been appointed. In cases where there has not been an appointment, an application will need to be made to the Court of Protection to appoint a Deputy. For further information on making applications to the Court of Protection and appointing a deputy see our articles here.

What if the format or type of medical opinion is inadequate or impracticable?

In cases where there is no opinion by a treating doctor or it is inadequate or impracticable (i.e. a company cannot rely on Article 18 (d)) there are other options available to the Company as follows:

Removal by shareholders

it is possible by a simple majority of the Shareholders to remove a director under Section 168 of the Companies Act 2006. A General Meeting will require notice to be given to the director and must only be called following special notice procedures. The director in question may therefore speak at the meeting in their defence. Shareholders who are looking to remove a director by virtue of section 168 should take advice so as to ensure they are not exposed to a discrimination claim by the incapacitated director. Both the Mental Capacity Act 2005 and Disability Discrimination Act suggests that persons should be supported and reasonable adaptations made so as to facilitate their full participation. Only in circumstances where it is evidently clear that the director is not capable of undertaking the role could they be removed, without exposure to a claim.

Termination of employment contract

Directors are normally also employees of the company. Their position as an officer of the company remains distinct from their role as an employee. The directors, if quorate, can therefore consider termination of the incapacitated director’s contract of employment. It should however be noted that the termination of their employment contract will not automatically lead to removal of the director from his position as an officer of the company, but may lead to the desired outcome, on the basis of withdrawing the reward for director’s efforts.

Any termination of an incapacitated director’s employment contract should be carefully considered as the termination director’s appointment as an officer of the company, on the grounds of incapacity or otherwise, does not strip the director of his/her right to claim compensation for breaches of employment rights or his/her entitlement to contractual payments arising out of his/her termination of employment. The contract of employment should therefore always be consulted prior to any action and advice sought to minimise exposure to claims.

David Wedgwood will be presenting at the STEP conference on 9^th December 2022 where he will discuss the practical considerations in further detail. To sign up to the event, please click here.