Danielle Cahill, Partner, and Abbie Mattocks, Solicitor, in our Private Wealth Disputes team, explore the challenges trustees face when concerns arise about the mental capacity of a director.
Many successful family businesses are built around exceptional founders who continue to lead their business well into later life. They are often the people who took the risks, built longstanding relationships and made the business what it is. As life expectancy increases, it is becoming increasingly common for founders to serve as directors or hold other significant roles within the business well into their later years.
Undoubtedly, this continuity and experience can be invaluable. However, as directors remain in office for longer, issues relating to their mental capacity are becoming increasingly common. These challenges become particularly acute in circumstances where the business is held within a trust structure, and the trustees have duties not only to respect the history of the family business, but also to protect the trust assets for the beneficiaries.
At what age should directors retire?
Although there is a minimum age of 16 to be appointed as a company director, there is no statutory age of retirement, meaning that directors can continue to serve for as long as they remain willing and able to do so.
The trustee’s dilemma
Many family businesses are held within trust structures, adding a further layer of complexity where concerns begin to emerge about a director’s capacity to continue carrying out that role effectively. At that point, trustees may find themselves facing difficult decisions, particularly where the director remains central to both the business and the family.
This is not, in reality, an issue of age. Many individuals are entirely capable of serving as directors well into later life, while others may experience a decline in decision-making ability much earlier. The question for trustees is therefore not how old a director is, but whether the company continues to be governed effectively and whether the trust’s assets are being properly protected.
This can be particularly difficult where the individual in question is also the settlor who created the trust, the founder who built the business and the person who remains central to its identity and success. In many cases, they may be a family member, and the trustees may have worked alongside them for years.
In that context, it is entirely understandable that trustees may be wary about questioning whether that person should continue to be involved in the business in the same way.
While loyalty and respect for a director are understandable, trustees should not lose sight of the fact that their fiduciary duties are owed to the beneficiaries. Those duties require them to act in the best interests of the beneficiaries and take reasonable steps to protect the trust’s assets.
That does not mean rushing to conclusions or treating age as a proxy for incapacity. It does mean taking concerns seriously where they begin to affect governance, decision-making or the value of the trust’s interest in the business.
When do concerns about capacity become a governance issue?
A diagnosis of a cognitive impairment does not automatically mean that an individual can no longer act as a director. Equally, a director need not lack capacity before trustees begin to have legitimate governance concerns. The question is whether the individual remains able to understand the matters before the board, exercise independent judgment and discharge the responsibilities of the office.
Capacity is assessed by reference to the Mental Capacity Act 2005 (the “Act”) and is both time- and decision- specific. Assessing capacity is therefore not straightforward, and trustees are not expected to act as clinicians. However, trustees should be alert to objective signs that a director’s ability to fulfil his role may be declining.
Why trustees should be aware of the risks
The consequences of having an active but incapacious director running a company can extend well beyond the boardroom and expose both the company and the trust to significant risk. In practice, this may look like erratic decision-making, an inability to engage with financial information or professional advice, deteriorating internal relationships or persistent board deadlock.
In some cases, a loss of judgement or inhibition may even result in inappropriate behaviour towards colleagues or employees, creating potential employment, regulatory and reputational issues for the business.
What can a trustee do when they have concerns about a director’s capacity?
The challenge is that these situations often develop gradually rather than emerging from a single dramatic event. Instead, concerns often accumulate over time, leaving trustees to determine when a founder’s continued role presents a sufficiently serious governance risk to justify intervention.
Trustees should be mindful that, depending on the circumstances, inaction may itself amount to a breach of trust where reasonable steps should have been taken to protect the trust’s assets.
Where there are concerns about a director’s declining capacity, trustees should first understand the extent of their powers and the company framework within which they are operating before considering what further action is required.
This may include reviewing the trust deed and the company’s articles of association, obtaining further information about the concerns that have arisen and seeking professional legal advice.
Ultimately, the importance of early intervention cannot be overstated. Early and proactive planning is often the most effective means of avoiding difficult governance decisions and preserving both the trust’s interests and the stability of the family business.
The most difficult governance decisions for trustees are often not legal ones but human ones. In these circumstances, determining when fiduciary duties require intervention is not a simple task.
Trustees are unlikely to be criticised for recognising governance issues too early. In contrast, difficulties arise where important warning signs are overlooked or not acted on. To prevent tricky family situations from becoming protracted legal disputes, comprehensive succession planning, clear governance arrangements and early legal advice are invaluable.
