How do you deal with a Company Director who may have dementia? I was recently asked this question by a Director’s partner and co-Director, who needed to act quickly, in relation to their insolvent company. It raises a number of fundamental questions, not only relevant to the insolvency process, but the day to day running of a company. Of the 2.6 million live companies registered in the UK, the vast majority are small, often family owned and run. Over the years I’ve lost count of the number of times Directors have described their business as being like a child they have nurtured and developed. Dealing with a Director whose mental capacity is in question is therefore not only a potential legal minefield, but an emotional one as well.

Liquidation Process

In order to put a company into Liquidation it is necessary for the Directors to instruct an Insolvency Practitioner, to assist them in convening meetings of the company’s shareholders and creditors. In layman’s terms, the Director must be aware of what he is doing, its consequences and be prepared to do it. With small companies, the Directors are also usually the shareholders, and the agreement of in excess of 75% of shareholders is required to pass the Resolution placing the company into Liquidation. Again, the issue of the shareholder’s awareness of the meeting and consequences of their vote are vital. A colleague suggested that if there is an issue as to the Director’s mental capacity, just get them to resign. At first glance, the obvious solution. However, if they lack the necessary legal capacity, how are they capable of resigning?

What Guidance is there for dementia and companies?

Fortunately there is assistance available in the form of The Mental Capacity Act 2005. This applies to England and Wales and sets out a framework to protect individuals who are unable to make decisions for themselves. In addition the company’s Articles of Association often contain provisions that deal with Directors who have mental health problems, although these tend to only apply where a Court has made a formal order in relation to the director’s mental health. What then does it say?

What is Mental Capacity?

This is the ability to make decisions for yourself, without someone else having to decide for you. It might not even be a good or wise decision. When through illness, mental health problems or a physical disability, you become unable to make these decisions, you are said to “lack mental capacity”. Where things get complicated are where you can make some decisions, but not others. In order to test capacity, four questions are asked of the person concerned;

• Do they understand the information that is relevant to the decision that is being made?
• Do they retain the information for long enough to be able to make the decision?
• Can they weigh up the information?
• Can they communicate their decision to you? This can be verbal, sign language, or even blinking an eye.

From an Insolvency Practitioners’ standpoint, you are often giving advice the recipients don’t want to hear and have a strong emotional response to. We are used to having to explain legal and financial issues to those less experienced in such matters. Where there is the possibility that the issue of capacity could be raised, it seems vital that you ensure you are satisfied that the above four questions are considered. The answer must be “yes” to each question. Anyone who has experience of a relative or friend with dementia will probably tell you that they have good and bad days, and that their understanding is better at certain times of the day. Thus, Capacity can vary.

Mental Capacity Act 2005 Five Main Principles

1. Every Adult is assumed to have capacity (i.e. has the right to make decisions for themselves) unless they can’t comply with the 4 tests described above
2. Every adult has the right to be supported to make a decision. All reasonable help and support should be provided to them to assist in making and communicating that decision.
3. If a person lacks capacity any decisions taken on their behalf must be in their best interests. Would it have been what they normally want for themselves?
4. If you have capacity you have the right to make a decision that others could see as strange or unwise.
5. If a person lacks capacity, any decision taken on their behalf must be the least restrictive option for them, having the minimum impact on their rights and freedoms.

Conclusion

With an ageing population, an understandable reluctance on family members to tackle their co-Directors whose mental capacity is beginning to fail, this will become a more common occurrence. If Insolvency Practitioners approach the issue with some humanity and pragmatism, it should be possible to resolve matters. We are not medical professionals, nor are we social workers. Mental Capacity is, however, a bit like an elephant; difficult to describe, but you know it when you see it. If you are put on notice that a Director has been diagnosed with dementia or Alzheimer’s then you may wish to consider seeking medical advice on their Capacity. For the most part, I suspect we might just have an off the cuff comment from a co-Director, to put us on notice. If there is any doubt about the four Capacity tests set out above, further advice would need to be obtained, with a possible application to the Court of Protection if required. If this blog raises any areas of concern to you, please feel free to contact me at mike@lineshenry.co.uk.