What happens if a director or shareholder loses capacity?

The vast majority of private limited companies incorporated and operating in England and Wales are owner-managed businesses. Frequently, the owner of a private limited company will be a single individual who will be the sole shareholder and the sole director of the company.

Whilst being a sole owner and director of a business gives the individual great freedom and control over the company’s operation and decision-making, it can also lead to significant problems should something happen that causes that individual to lose mental capacity. This may be something that happens gradually, perhaps through an illness, or suddenly, for example, due to an accident. Loss of mental capacity can, of course, be temporary, but nevertheless, it still has the potential to create major problems in a business. 

What happens following the loss of capacity

What happens following the loss of capacity of someone who is both the sole director and sole shareholder of a company will very much depend upon what the articles of association of the company say. Many companies in England and Wales adopt Model Articles at incorporation and those companies incorporated before 1 October 2009 will often be governed by Table A articles of association.

Irrespective of whether the company is subject to Model Articles, Table A or bespoke arrangements, the loss of capacity of a sole shareholder and director can potentially have drastic consequences. 

Directors

Directors of a company are individuals who have the authority to bind and direct a company. A director losing capacity can cause a company to simply grind to a halt. More often than not it is the director of a company who would sign contracts, organise payroll and have the authority to deal with the company’s bank and make payments. It is easy to see how very quickly a company could unravel if a sole director had lost capacity and the company was no longer able to enter into contracts, make payments or access its banking facilities.

It is of course easy to say that a company should have a minimum of two directors so that if one were to lose capacity, someone else could take over. However, this is easier said than done. Directors have certain statutory duties and responsibilities, which may deter others from taking on that role. Having a second director also dilutes control and removes the autonomy that one individual would otherwise have had. Having two directors in place also creates the potential for disagreement within the board, especially if one director wishes to take the business in one direction whilst the other wishes to follow a different strategy.

Shareholders

Although shareholders own the company they generally have very little control over its day-to-day operation. But there are still important functions that can be performed by a shareholder, particularly with regard to the appointment and removal of directors. That ability clearly becomes more important in the event that a director was to lose capacity. But if the director of the company is also the shareholder and that individual loses capacity, the company may well have difficulty in operating as set out above.
Often a good solution is to have in place a lasting power of attorney, which gives a trusted individual or individuals the ability to manage your affairs in the event that mental capacity is lost. It should be noted, however, that the role of the director of a company is a personal appointment and is not something that can be delegated by power of attorney.
 
To ensure protection for your company, you should seek professional advice to assess risk and set in place a plan. Doing so will prevent your company from grinding to a halt should the worst happen.

If you require any advice or further information please contact Tim Field on  01206 217366 or [email protected].