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.

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.

In the event that a director loses mental capacity, the company is likely to seek to remove the director and replace them by reference to the appropriate version of their company’s Articles of Association.

Most older companies, incorporated under the Companies Act 1985 or earlier legislation, use the standard Table A Articles. For these companies, the procedure is governed by regulation 81. Modern companies, incorporated under the Companies Act 2006, normally use the Model Articles. The procedure there is governed by Article 18 of the Model Articles of Association.

Table A companies – prescribed by the Companies Act 1985

Regulation 81 prescribes the circumstances in which the office of the director shall be vacated. This removal is automatic if he is suffering from a mental disorder that curtails his capacity to act. However, to qualify under that provision either:

1. He is admitted to hospital in pursuance of an application for admission for treatment under the Mental Health Act 1983 (MHA 1983) or, in Scotland, an application for admission under the Mental Health (Scotland) Act 1960, or
2. An order is made by a court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the appointment of a receiver, curator bonis, or another person to exercise powers with respect to his property or affairs.

The second clause will include the appointment of a deputy. If the Companies Tables A to F Regulations has been excluded, then neither of the above is applicable. Instead, the shareholders may exercise their powers to remove the director by passing an ordinary resolution.

Post 2013 – Model Articles governed by the Companies Act 2006

On 28 April 2013, The Mental Health (Discrimination) Act 2013 came into force and amended the Model Articles of Association, as set out in schedules 1 to 3 of the Companies (Model Articles) Regulations 2008. The Act removed certain provisions regarding the termination of a director’s appointment due to mental health issues and in particular paragraphs 18(e) of Schedule 1, 18(e) of Schedule 2 and 22(e) of Schedule 3 were removed (see our blog on the Mental Health (Discrimination) Act 2013).

Of course, there continues to be a need for companies to be protected in cases where a director loses capacity. For companies who have been incorporated using the Model Articles post April 2013 are now governed by Article 18 (d) which states that a person ceases to be a director as soon as—

“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”.

The directorship will therefore automatically terminate in cases 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. 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.

David Wedgwood will discuss incapacitated directors at the STEP conference on 9^th December 2022. To sign up to the event, please click here.

When setting up a company it is rare for entrepreneurs to consider what should happen if they lose the mental ability to manage the enterprise. However, accidents and health setbacks do happen and can result in loss of capacity for business owners. At that point, the person who then knows most about the business is not able to say how the ensuing crisis should be handled. The result is often a vacuum in decision-making followed by insolvency and the loss of all the hard work and resources invested.

That can be avoided if a lack of capacity is identified early and action is taken.

Capacity is regulated by the Mental Capacity Act 2005 (“MCA 2005”). When dealing with capacity issues, the following principles should be considered:

1. A presumption of capacity.
2. The diagnostic test – whether there is an impairment or disturbance of function of the mind.
3. The functional test:
   1. Ability to understand information relevant to the decision – issue-specific
   2. Ability to retain that information – time specific
   3. Ability to weigh up that information
   4. Ability to communicate the decision

Shareholders

If a shareholder loses mental capacity but has made an Enduring Power of Attorney (EPA) or a Lasting Power of Attorney (LPA), the nominated attorney can step in and vote on resolutions on the shareholder’s behalf, provided the LPA allows them to and provided they are not barred from doing so by the articles of the company or the shareholders’ agreement.

If the shareholder does not have an LPA, an application will need to be made to the Court of Protection for a deputyship order. It is important to note that loss of capacity does not change ownership of dividend rights.

Directors

A director is a company officer, and they are also normally employees of the company. Directorship, unlike shareholder decisions, is a personal office; therefore, the powers and duties vested in them cannot be delegated to an attorney, following loss of capacity for business owners. Even if a Lasting Power of Attorney has been validly executed and registered, the attorney does not have the authority to step into the shoes of the director, as an officer or an employee.

Whilst the MCA 2005 does make it clear that, if possible, a disabled director should be assisted to continue making decisions, there are no provisions in the act for replacing an incapacitated director. The replacement of a director is dealt with in the company’s articles of association.

David Wedgwood is speaking on Friday the 9^th of December 2022 at the Step Special Interest Conference on the practical implications of a director’s loss of capacity and strategies for mitigating loss.

The name of 12-year-old Archie Battersbee is one that has been regularly found in the headlines of news outlets in recent weeks, following the four-month legal battle which ultimately led to the withdrawal of his life-sustaining treatment earlier this month. The circumstances of this case are tragic and involved extremely difficult decisions on behalf of the treating clinicians, Archie’s family, and the Judiciary who ultimately deemed that it would not be in Archie’s best interests for his treatment to continue. It is important to understand the legal framework which provides the scaffolding for such complex decisions.

The decisions handed down in Archie’s case were made under the Inherent Jurisdiction of the High Court. The Inherent Jurisdiction is a legal mechanism which has been described by some as a ‘safety net’, enabling the court to implement protective measures in situations where there is no power to intervene specifically set out in statute.

Prior to the enactment of the Mental Capacity Act 2005, which established the Court of Protection as a specialist branch of the Court with powers to make specific decisions on behalf of those who lack capacity; cases like Archie’s were dealt with under the Inherent Jurisdiction of the High Court. Contested decisions in relation to the medical treatment of children continue to be regulated under the Inherent Jurisdiction, as the Court of Protection’s powers do not apply to those who are under 18 for Welfare based matters.

The remit of Court’s Inherent Jurisdiction is far reaching, and the Court has the power to deal with issues of capacity, as well as individuals’ vulnerability, where capacity is a non-issue. Case law has established that the Inherent Jurisdiction of the High Court may still be applied where an adult has been deemed to have capacity, but that person is significantly vulnerable and believed to be either:

1. Under constraint;
2. Subject to coercion or undue influence;
3. For some other reason deprived of the capacity to make the relevant decision, or disabled from making a free choice, or in capacitated or disabled from giving or expressing a real and genuine consent.

An example of when it may be appropriate to invoke the High Court’s Inherent Jurisdiction in relation to an adult may be where steps need to be taken in relation to marriage, contact or residence where someone has been party to significant coercion and control in a relationship, or where steps need to be taken to protect someone from financial abuse, even where they are deemed to have capacity to make decisions in relation to their property and affairs.

The Inherent Jurisdiction of the High Court is therefore not only a concept that is relevant to headline-grabbing cases such are Archie’s, but one which legal representatives should consider when working with vulnerable individuals in a wide range of circumstances where the safeguards of the Mental Capacity Act 2005 cannot be applied.

Anthony Gold is pleased to mark Partner Donovan Lindsay’s 40^th anniversary with the firm and celebrate his election as President of the South London Law Society.

Donovan first joined Anthony Gold in 1982 from school as an outdoor clerk for the firm, he then went on to work mainly with the firm’s criminal law department, later retraining in family law. Obtaining a legal qualification as a Chartered Legal Executive positioned Donovan well when he moved to Court of Protection – his current specialism.

With over 25 years of experience, Donovan’s work involves managing financial affairs for vulnerable adults and children who are no longer able to manage their affairs due to lack of capacity. He predominately helps vulnerable elderly clients who suffer from dementia, and people who have been awarded damages as a result of a personal injury claim. Donovan maintains a strong reputation for supporting vulnerable clients and is recognised as one of the leading elderly client practitioners in this field.

On Donovan’s time here at Anthony Gold Managing Partner, David Marshall, said: “I think that Donovan’s career is a great example. He has worked hard, studied hard, been flexible to change, and is hugely popular both inside and outside of the firm. We are all very proud of what Donovan has achieved, especially making Partner last year.”

In June 2022, Donovan was elected as President of the South London Law Society, after being a member of its committee for the past eight years and its Vice-President for 3 years. As a result, he has been invited to take part in and host a number of discussions including a Black Lives Matter debate which was organised through the London South Bank University. Panellists included Imran Khan QC and Stephanie Boyce (the first Black President of the Law Society of England and Wales). Throughout the years, Donovan has continued to provide mentoring to undergraduate students at London South Bank University, recognising the importance of making a personal investment into the next generation of lawyers. His story of hard work and progression is inspirational.

The Court of Protection

The new Court of Protection was established on 1 October 2007 by s 45(1) of the Mental Capacity Act 2005. The original name ‘Court of Protection’ having been given to the Court 1947. The powers of the Court of Protection are set out in sections 15 to 23 of the Act but it may also exercise its inherent jurisdiction. The court has jurisdiction over the property, finances, personal welfare and healthcare of anyone who lacks the mental capacity to make specific decisions about these matters at the time they need to be made. The purpose of the Court is to protect vulnerable people, ensuring that their Best Interests are the centre of any decision-making. Section 17 of the Act sets out the personal welfare issues the Court can deal with and Section 18 the Court’s powers over property and affairs. Section 20 of the Act sets out decisions that only the Court can make.

Court of Protection General Powers

The general powers of the Court include the ability to make declarations, make decisions on behalf of someone who is found to lack capacity, appoint a Deputy, authorise detention if it is in the Best Interests of a person to do so and where a person is under 18, with the authority of the Lord Chief Justice transfer proceedings to the High Court.

Court of Protection Specific Powers

In addition the Court may under Section 21A of the Act, providing it is in the best interests of a person to do so at the time, review a DoLS authorisation. Under Section 22 of the Act the Court can review, alter, monitor and if necessary revoke a Lasting Power of Attorney (or if made prior to October 2007 an Enduring Power of Attorney) if it is found the requirements for creating it have not been met, or where an attorney has, or is acting in contravention of the authority given to them or is not acting in the persons Best Interests. It may alter the nature and scope of any decision and give additional authority if it is found to be in a persons Best Interest to do so.

Court of Protection and the Office of the Public Guardian

The Court of Protection works closely with the Office of the Public Guardian (OPG) with the Court able to make decisions under the Act and the OPG having an ongoing statutory supervisory role to ensure that Attorneys or Deputies carry out their legal duties.

Why is the Court of Protection needed?

The Court is able to assist where a serious decision needs to be made for someone who lacks capacity and there is a disagreement or where no one is authorised in that respect. An application should be made where consensus cannot be reached having exhausted other options including a Best Interests meeting.

Grainne Feeney has over 20 years’ experience, and is a specialist in non-contentious Court of Protection matters, including deputyships for people who become mentally incapacitated through illness or personal injury.

Get in touch with Grainne on 020 7940 4060 or at grainne.feeney@anthonygold.co.uk

Previously in the Capacity and Marriage Blog Series

In his latest article, my colleague David Wedgwood discusses “predatory marriages”, with reference to where vulnerable and often elderly individuals are married without the capacity to do that. My colleague Alexandra Knipe had earlier discussed the legal test for capacity to marry. In these circumstances, the “predator” would inherit their estate under the intestacy rules, as marriage automatically revokes any pre-existing Will.

The Procedure to Put in Place a Marriage Caveat

If there are concerns that a relative or friend may be subject to a predatory marriage, then it is sometimes possible to prevent that from happening. One way of doing this is to put in place a caveat at their local registry office. The procedure for this is set out under s.29 of Marriage Act 1989. Any person can enter a caveat with any superintendent registrar under the Marriage Act 1949.

1. The caveat is in force until the superintendent registrar has examined the matter and decided either that the marriage should go ahead, or the person who entered it has withdrawn it.
2. If the superintendent has doubts on whether it should or shouldn’t go ahead then they may refer the matter to the Registrar General.
3. If a marriage is obstructed by the superintendent registrar, then a relevant party can appeal to the Registrar General who can either confirm the refusal to marry or confirm that the marriage should proceed.
4. If a caveat is entered and deemed frivolous then they can be liable for costs of the proceedings before the Registrar General and for damages recoverable by the person  whose marriage the caveat was entered.

In practice, putting in place a caveat involves calling your local registry office with the following details:

• The details of the party(ies)
• The name and address of the objector
• The grounds of the objection

In terms of showing grounds for and objection, a medical assessment from a GP, or a Doctor setting out the concerns over an individual’s capacity to marry is usual.

The superintendent registrar would then enter the caveat on their online system for non-religious venues across England and Wales. If a notice of marriage is entered at any time in the future, it will be linked to the caveat and the matter will be investigated.

It would be for the person whose marriage the caveat was entered against to appeal the caveat to the Registrar General.

Safeguarding Vulnerable Individuals

Unfortunately putting in place a caveat is not a fail safe way to prevent a predatory marriage taking place.

Discovering the intention of a predatory marriage can be difficult. Although 28 days’ notice is required, many people do not search at the local registry office – it is not put on the internet.

There are calls to change the law to safeguard vulnerable individuals in this area, however in the meantime it is important that if there are concerns concerns that an individual might be coerced in to a marriage, or exploited in this manner;  then the local authority and police should be notified.

Furthermore, consideration should be given to putting in place a caveat, if appropriate.

It is important to note that the registry office cannot put in place a caveat to prevent a marriage at a religious venue. Hence extra vigilance is needed in terms of checking whether the banns have been read at a local church and putting a local church on notice of any concerns.

In our next blog Ffion Jones will consider an alternative method of preventing predatory marriages namely Forced Marriage Orders.