Loss of capacity by a company director
Consideration of what will happen in case of death or loss of capacity by a director should be part of a standard process when setting up a company.
A director is a company officer, but also normally an employee of the company. As directorship is a personal office, it cannot be delegated to an attorney. Hence, even a validly executed and registered LPA does not give the attorney the power to step into the shoes of the director, either as an officer or as an employee.
What happens therefore in case a director loses capacity?
One needs to consider the Articles of Association of the particular company. In this article I will focus on companies using the model articles for modern companies, prescribed by the Companies Act 2006. If a company is using bespoke Articles or model articles under earlier legislation, the situation needs to be considered by reference to the appropriate version of the Articles.
Art 18 of the model articles states:
“A person ceases to be a director as soon as—
(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”
Where there is a written opinion by a treating doctor that the director is physically or mentally incapable to continue in the role for more than three months, directorship automatically terminates. No agreement of the other directors (as to the termination or as to whether the person in question in fact lacks mental capacity) is needed. The company should prepare a board minute recording the termination and the company secretary should file the requisite form with Companies House to remove the director’s name from the record.
What happens however when the incapacity of the one director prevents any board meeting being quorate (so that a record of the termination of the office cannot be made internally and external records accordingly cannot be updated)? How can a company continue to operate without the director?
Under Art. 11 a board meeting that is not quorate can still appoint a new director or can call a general meeting so that shareholders can appoint a director. The meeting must be at the instigation of the board of directors. Accordingly, if there are no directors to call a general meeting, shareholders will need to apply under section 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 section 306 application will vest with the director’s attorney or deputy if one has been appointed. If none has been appointed, an application to the Court of Protection will be necessary to appoint a deputy.
What if the format or type of the opinion about the director’s capacity is not one as specified above (e.g. it is issued by not a treating doctor or it does not confirm the lack of capacity for a sufficient duration of time)? In that case the office of the director will not be automatically vacated. As such, how can a director be removed?
The directors, if quorate, can normally terminate the incapacitated director’s contract of employment. This need not vacate the office of director, however withdrawing the reward for director’s efforts may lead to the desired outcome. What happens when directors are not able to act (e.g. they are not quorate)? Art. 7 allows the company to appoint additional directors by ordinary resolution. The company may therefore gather the necessary quorum to terminate the incapacitated director’s contract of employment. If the board is completely unable or unwilling to act, Art. 4 allows shareholders to direct the board by a special resolution to take a specific action (e.g. terminate the incapacitated director’s contract of employment).
Shareholders always have the option of removing a director from office by ordinary resolution at a shareholders meeting under section 168 Companies Act 2006. Meeting must be called following special notice procedures and the director in question may speak at the meeting in his defence.
The termination of the director’s employment contract will not automatically lead to removal of the director from his position as an officer of the company. However, removal of the director from the position of an officer of the company will automatically terminate his/her employment contract. The automatic termination of employment does not strip the director of his or her right to claim compensation for breaches of employment rights or his/her entitlement to contractual payments arising out of his termination of employment. The contract of employment should therefore always be consulted prior to any action.