Practitioners have been urged to review existing SMSF corporate trustee constitutions to ensure they include clear provisions and clauses that provide a defined process for handling incapacity events as the law does not explicitly define what should occur if a director of a corporate trustee loses capacity.
DBA Lawyers director Dan Butler noted incapacity events are expected to become more frequent and emphasised the wording used in constitutions to define capacity is critical as different terms may require separate legal tests.
“As advisers, what do we need to keep our eye on for loss of capacity and how do we develop policies within our firm to deal with loss of capacity? With a company, the Corporations Act does not remove someone from directorship if they lose capacity, so it depends on the constitution,” Butler noted during a webinar held by his firm recently.
“What does your constitution say and in particular what terms does it use? Is it incapacity, is it unsound mind or is it mental incapacity or like terms? If we have these terms, what are the tests and when will that director, under the constitution that you have, be taken out?
“We really need to keep our eye on the ball as the courts or the law does not prescribe any fixed normative standard for sanity or to be removed [as a director].”
He pointed out the recent court case of Van Camp v Bellahealth Pty Ltd demonstrated the level of evidence and detail that may be necessary to prove or disprove an individual’s capacity.
To this end, he suggested practitioners may need to revisit and update their protocols for assessing capacity.
“It does get a bit technical because whether a person has lost capacity will be determined based on the issue or context of what is being considered. It’s not just purely a black and white decision,” he said.
“Careful consideration is required and advisers need to be mindful of who they are acting for and whether there are bad actors, whether there’s elder abuse, whether there’s a scammer or other risks are involved.
“You are protected if you have a checklist and a process to go through and get qualified evidence from someone like a medical practitioner or an expert who specialises in cognitive or neurological assessment.
“The right timing and wording is key as well to be sure the person has lost capacity because you can [lose] capacity one moment, but [possess] capacity another and make a fluid and capable decision.”
