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Winter 2016: Legal update

Company directors and the shareholders (where relevant) are advised to protect themselves against the risk of a mentally incapable director holding office in the company. The fiduciary duty of the other directors requires them to act to protect the company.

Discrimination by employers on the grounds of a disability relating to mental health is prohibited by the Equality Act 2010 (“the Act”). In addition, if the conditions of the Act are met, a duty is imposed upon employers to make reasonable adjustments to their usual policies and procedures for disabled employees.

Further to this the Mental Health (Discrimination) Act 2013 (“the MHD Act”) came into effect with the purpose of removing the stigma associated with mental illness and amends the model articles set out in company legislation. The criticism was that the model articles discriminated against individuals suffering with mental illness by limiting their ability to serve as company directors.

Accordingly, the MHD Act revoked article 18(e) of the model articles for private companies limited by shares and by guarantee. Article 18(e) previously provided that a person would automatically cease to be a director upon an order of the court preventing the person from exercising their powers on the grounds of mental health.

However, if a company adopted the model articles after 28 April 2013, or has removed this model article, a director suffering from a mental health issue will not automatically cease to be a director of a company.

Removing the director or arranging for a suitable order from the court to replace the director could take a great deal of time and put the business at risk for many months. Further, there are concerns that banks and other institutions may restrict or recall services they offer to that company if a director is unable to perform their role.

In light of the above it is now more common for a director to choose to make a specific Lasting Power of Attorney (“LPA”) for business purposes, in addition to having a LPA for their own personal affairs.

The use of a LPA by a director does not appoint a replacement director but allows another party to act in the best interest of the director who is unable to perform their role. The actions which could be undertaken should be discussed by the directors together when preparing the LPA. This is considered a reasonable adjustment for the purposes of the Act whilst also protecting the business from potential loss of services such as the business’ overdraft and gives the remaining directors (if any) the time required to resolve the situation.

There are many issues to consider before a director appoints an attorney including the practicalities and suitability of the appointment, for further advice on appointing an attorney on behalf of a director please contact Darrell Stuart Smith, a Partner in our commercial team at our Dorchester office on 01305 251007. 

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If you have a legal issue that needs addressing, no matter what the query, a call to the DBA’s legal service provided by Humphries Kirk LLP, is an advisable first port of call to save you valuable time and money.

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