Business owners and loss of mental capacity: Limiting a Company’s exposure to Claims

Limiting a company’s exposure to claims is of utmost importance if the business owners lose mental capacity. Here is what you should know:

Exposure to risk

If a director loses mental capacity, the company is exposed to a range of possible claims.

A director can legally bind a company, even if he is acting outside the authority given by his company’s articles, as long as the person entering into the contract with the company does so in good faith, as stipulated in section 40 of the Companies Act 2006.

A company is exposed to risk in cases where the incapacitated director appears to have apparent authority and binds the company, even if he is acting in contravention of the company’s express instructions. It is also worth noting that Companies can also be vicariously liable for the wrongdoing of directors.

To minimise any exposure, the company should prepare a board minute recording the termination. Companies House should then be notified of any new director appointment (using form AP01) or director termination (using form TM01) within 14 days of the date of appointment or termination, and that the company’s register of directors is promptly updated.

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.