Removing Directors Who Lack Mental Capacity

When a director of a company appears to lack capacity, the process to remove that director can depend on the company articles of association and on the applicable Companies Act.

Background

When a company is incorporated, the company is generally governed by the Companies Act that is in force at the time of formation, in addition to the company’s own articles of association, or provisions under Table A or the Model Articles, if the company has chosen to adopt those. This is a general rule as the company may include in its articles of association a succession clause by virtue of which the company will be governed by the most recent version of the Companies Act which is in force at the time, irrespective of the act applicable at the time of its incorporation. Irrespective of which Companies Act is applicable, each of them provides for the removal a company director based on lacking capacity. This article will detail the processes under which a director can be removed on the basis of lacking capacity under the Companies Acts 1948, 1985 and 2006.

Companies Act 1948

Under this Act, the process for removing a director is governed by paragraph 88(d) of the Table A regulations, which provides that the office of director shall be vacated if the director “becomes of unsound mind.”

The term “of unsound mind,” was defined by Lord Justice Buckley as “a question of medical opinion, and must be investigated upon medical evidence,” in Counties Assets Company Limited v Brighton Grand Concert Hall and Picture Palance Limited [1915] 2 K.B. 493.

The term has also been defined in recent years for the purposes of the European Convention of Human Rights and, in turn, Court of Protection litigation. In Ilnseher v Germany (10211/12 and 27505/14 10211/12 and 27505/14), the term “unsound mind,” was found to mean “a true mental disorder must have been established before a competent authority on the basis of objective medical expertise.”

What is clear from the definitions above is that medical evidence is required in order to remove a director for lacking capacity. Once the appropriate medical evidence has been acquired, the company should pass a board resolution noting the fact that medical evidence has determined the director in question lacks capacity and therefore the director’s office is vacated. The company is required under section 200(5)(b) to notify Companies House of the director’s resignation within 14 days of the resolution which should be done with the filing of a TM01 form.

Companies Act 1985

Paragraph 81(c) of the Table A Regulations under the Companies Act 1985 stipulates that the office of director shall be vacated if the director lacks capacity and:

1. the director was admitted to hospital after an application for admission for treatment under the Mental Health Act; or
2. an order is made by the Court appointing a deputy or other office exercising powers over the director’s property or affairs.

Either one of the processes above will result in the director’s office being vacated. The company should notify Companies House of the vacation of the office within 14 days of the resolution by filing a TM01 form.

Companies Act 2006

The Model Articles 2008 notes under paragraph 18(a) 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.”

How the Mental Health (Discrimination) Act 2013 amended the removal of directors on the basis of lacking capacity”, sets out the amendments to the Companies Act 2006 under which a court order preventing the director from exercising powers or rights is no longer sufficient to remove the director. As such, under the 2008 Articles, the only way to remove an incapacitated director is to get a registered medical practitioner, who is already treating the director, to make such a declaration. Upon such a declaration, the person lacking capacity stands automatically removed as the company’s director.

A registered medical practitioner is defined by the Care Quality Commission as “a doctor fully registered with the General Medical Council.” The requirement is that the medical practitioner must be treating the director. This suggests that the director’s General Practitioner could make this opinion and that it is not necessary for the director to be treated by a psychiatrist.

Before removal, the company should make efforts to support the director so as to facilitate their continuance in the role and consider if there are ways the director can still perform their duties in order to not fall foul of the Mental Health Discrimination Act 2013. If that is not possible the company should record their considerations and attempts.

Under the 2008 Articles it should be noted that the cessation is automatic and that subsequent resolutions would only be recording the finding and authorising the TM01 form, which must be submitted to Companies House within 14 days of passing the resolution.

Practical Problems

In practice it is very difficult to get a treating doctor to report on capacity, unless the diagnosis is very clear, such as a coma or the person being admitted into a psychiatric hospital or mental health facility. If a treating doctor will not give a formal opinion, then an independent expert might be considered. Whilst this will not facilitate automatic removal, it would be useful to ward off any discrimination or employment claim. That said, it is often difficult to get a director to agree to a capacity assessment or to submit such a report to the board, especially in cases where the director’s incapacity is borderline.

The director may argue that they are able to perform their duties to a sufficient degree and it is not in the company’s best interest that they be removed and resist any attempt by the other directors to remove them based on incapacity. This can often lead to discord amongst board members and overall difficulties in the running of the company.

In such a scenario, where agreement is not reached within the board, or a medical opinion cannot be obtained, then shareholders might consider removal of the director under section 168 of the Companies Act 2006, which is explained in our blog here “Can shareholders remove directors?“.

A point to consider is that even though a director is removed based on lacking capacity, they may continue to be a shareholder of the company. In those circumstances it would be even more onerous to facilitate their removal under section 168 which requires special notice to be given and an ordinary resolution to be passed. If the director in question is a majority shareholder, meaning they hold more than 50% of the total shares of the company, they can veto the resolution removing them from the board.

It is worth noting that a company’s articles of association or shareholder’s agreement may provide for weighted voting right for directors. The House of Lords in Bushell v Faith [1970] AC 1099 upheld the effectiveness of weighted voting rights conferred on a shareholder who was also a director by a company’s articles of association which had the effect that the director was always able to defeat a resolution to remove him from office. However, this decision is not relevant to companies listed on the London Stock Exchange as the listing rules strictly prohibits the listing of companies which contain articles restricting the removal of its directors.

In cases where removal of the incapacitated director is not feasible under section 168, another option is for the company to make an application to the court seeking a declaration that the director in question is unfit and lacks capacity and so should be removed from the board.

Conclusions

Whichever Companies Act governs a company’s articles of association, the process for removing a director on the basis of lacking capacity is slightly different. If your company is considering removing one of its directors on the basis of the director lacking capacity, professional advice at an early stage will assist in ensuring compliance with statutory provisions.