At Issue
7/19/2010 4:25:22 AM EST
The doctrine of mental incapacity: should it apply to companies?
Dantes Leung makes the argument that the doctrine of mental incapacity should be applicable to companies when confronted with dealings by insane persons acting on their behalf.
Posted by LexisNexis

In law, mental incapacity refers to the state of mind of a person who cannot understand the nature and effect of a transaction. The doctrine of mental incapacity has been recognised by law as a ground of relief to defeat an otherwise valid and binding transaction. Hence, in Re Beaney (deceased) [1978] 2 All ER 595 the deed of transfer under which an inter vivos gift was made was declared void and of no effect because the donor was found not to have the mental capacity to understand the nature and effect of her absolute gift. However, the position with contracts is different. Whereas a gift involves an exercise of bounty and no legal rights are created in the recipient, a contract involves a business relationship with the creation of legal rights and the obligations of both parties should be accommodated within the law as fairly as they can be: Errington v Martell-Wilson (deceased) (unreported). Thus a contract may not be avoided by a mentally incapacitated party unless he or she can prove further that the other party to the contract knew him or her not to be capable of understanding the contract: Imperial Loan Co Ltd v Stone [1892] 1 QB 599.

Case example
Coco was a rich lady who acquired a property at The Peak. Instead of registering the property under her own name, she decided to register it through a company, Mad House Ltd, of which she is the sole director and only member. She passed a written resolution to authorise herself to sell The Peak property and make a gift on behalf of Mad House. She later became insane and could not understand anything. Although mentally incapacitated, Coco sold The Peak property for nominal consideration to an old customer, Marco, who knew full well of Coco’s condition. Similarly she directed Mad House to give a sum of money to her best friend, Penny, who did not know that Coco was insane. How should the law deal with Mad House’s transactions above?

It should be observed that the doctrine of mental incapacity has been exclusively applied to natural persons. Although there is no legal rule which says that it is not applicable to legal persons, there is simply no precedent to the contrary. The explanation appears to be that corporations do not have minds of their own and so the application of the doctrine to corporations seems untenable. Nevertheless, where the directing minds behind corporations lack mental capacity, should the law afford corporations protection similar to those aforementioned? If the answer is in the affirmative, then how can companies be protected?

The usual company law devices are not helpful in the case example above since the question does not technically concern exceeding company objects, internal irregularities or defective appointment or qualification of directors. Indeed, the question would have been easily answered if Coco had held her assets and entered into those transactions in her personal capacity since the doctrine of mental incapacity would undoubtedly apply. Although Coco decided to hold her assets through a corporate vehicle, it would be surprising if, in such a case, the law strips her of the legal protection she deserves as a mentally incapacitated person merely for that reason. It therefore seems that legal coherence would require corporations like Mad House be afforded parallel protection, similar to mentally incapacitated persons, as it is the underlying members (ie Coco) who suffer ultimately.

The authority

It appears that the legal effect of a mentally incapacitated director acting on behalf of a company has never been authoritatively decided in Commonwealth jurisprudence. Nevertheless, it does not mean that Mad House’s problem is far-fetched. Indeed, the issue first arose in Fortune Asset Development Ltd v De Monsa Investments Ltd [2009] HKCU 1249. In this case, De Monsa Investments Ltd was a family corporate vehicle used for property investment. Mr Lauw, in Hong Kong, and his son, in Indonesia, were the company’s only two directors and shareholders. In December 2007, the company agreed to purchase some properties from Fortune Asset Development Ltd but in the end failed to complete the purchase. Fortune Asset therefore sued for rescission and damages based on the loss on sale price. The defence advanced that Mr Lauw, who signed the agreements for De Monsa, lacked mental capacity.

In the application for summary judgment, Saunders J considered the issue as to whether a corporation can escape from a contract on the basis of mental incapacity. Understandably, His Lordship did not pre-dispose of the issue. He merely concluded that: “it will not be a difficult proposition to argue that the lack of mental capacity of the director of the company may be attributed to the acts of the company”. Indeed, if the state of mind of directors can be imputed to companies to fix their civil and criminal liabilities, it would be inherently unfair if the mental incapacity of directors cannot be imputed to companies to ‘relieve’ their liabilities in appropriate cases.

The only complication is that a corporation is a legal construct and abstraction and, as such, does not have a mind of its wn but acts through the instrumentality of the underlying natural persons. The general agency principles inevitably apply and their application produces just results for corporations to a certain extent. The preference to use the agency principles alone was obvious when Saunders J attempted to look for authorities ‘dealing with the liability of the principal, himself perfectly sane, but acting through an agent lacking mental capacity’ (emphasis added), thereby avoiding the whole question as to whether the doctrine of mental incapacity is applicable to corporations.

Application of agency principles

The application of the agency principles to corporations is uncontroversial. In the case example, upon Coco’s mental incapacity, her actual authority was automatically terminated (see Bowstead and Reynolds on Agency, 17th ed, Sweet & Maxwell, UK, 2001, [10-002]). To establish Mad House’s liability in the property transaction, Marco will need to prove that Coco had apparent authority to deal with The Peak property, on behalf of Mad House, which he will not be able to do as he had knowledge of Coco’s mental incapacity. Regarding Mad House’s gift to Penny, it is likely that the rationale in Errington would apply and the gift should be void on the ground that actual authority had already been terminated, notwithstanding the absence of Penny’s knowledge regarding Coco’s insanity.

At first glance, the application of the agency principles has afforded the necessary protection to corporations like Mad House, but it also has two difficulties. First, it provides an escape route for corporations that have already approved the transactions. In the case example, if the written resolution had stated that the board considered and approved the draft contract and authorised Coco to execute it, in its current form, on behalf of Mad House, should the company be allowed to go back on its mandate merely because it so happened that an agent who later became insane was chosen? The result would be completely different if, hypothetically, another agent who remained sane throughout was chosen, but is this result justifiable given that it is necessary for Mad House to act through an agent anyway? If a contract involves the imposition of rights and obligations on the parties and the law requires a sane agent to protect the interests of the principal company, what about the gift to Penny which only involved a simple disposal of assets and which was thoroughly considered by the board? Second, if Marco had not known about Coco’s insanity, the contract would be valid and binding but Mad House may have a contractual recourse against Coco for acting outside her authority, which was automatically terminated by operation of law (see Bowstead, supra, [6-024]). Oddly enough, the act which is complained to be outside the authority was specifically mandated by Mad House.

More importantly, the sole application of the agency principles cannot produce just results unless the agent is insane. Suppose in the case example, the written resolution stated that the board had considered and approved the draft contract with Marco and authorised Samuel, a manager who was sane throughout, instead of Coco, to execute it in its current form. Unless Coco’s insanity can be attributed to Mad House, both the principal and the agent are sane, and the contract with Marco cannot be avoided even if Marco knew that Coco was insane. The injustice can be revealed when contrasted with the case where Coco herself was the principal; the fact that Marco knew about Coco’s insanity is sufficient to displace any actual or apparent authority on Samuel’s part.

Application of the doctrine to corporations

Justice requires that corporations be able to plead mental incapacity in appropriate cases like natural persons. This proposition is somewhat supported by section 5A(1) of the Companies Ordinance (Cap 32) which provides that ‘a company has the capacity ... of a natural person’. The application of the doctrine of mental incapacity to corporations has the effect of terminating the agency relationship from the principal’s end. Where a third party knowingly deals with a corporation with a controlling and directing mind which lacks the mental capacity, the corporation should be treated as mentally incapacitated and the third party cannot rely on any apparent authority.

When applying the doctrine to the case example, it is clear that Mad House should be treated as insane because Coco, its sole director, was insane. Marco’s contract was voidable since he knew that Coco, and therefore Mad House, was insane and there can be no actual or apparent authority on her part. Mad House’s gift to Penny would likewise be void. Even if Samuel, instead of Coco, was authorised to execute the contract it would still be voidable: Drew v Nunn (1879) 4 QBD 661.

The next question would be: on what basis should corporations be treated as being mentally incapacitated (Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500)? It seems that only the mental capacities of the company’s board members should be taken into account and the more directors on the board, the less likely the company would be treated as such. It is argued, in the case example, that Mad House was insane. If Mad House had two directors but only Coco was insane, Mad House should still be treated as insane since without Coco’s presence there was no quorum. It might be a stretch to argue that Mad House was insane if it had three or more directors but only Coco was insane. The case is even more difficult if Coco had attained an authoritative position on the
board such that her decision was often followed and concurred. On the one hand, directors owe fiduciary duties to act in the interests of the company: Re Smith & Fawcett [1942] Ch 304. On the other hand, crossing that threshold of fiduciary duties, where the directors’ decision was influenced by Coco taking into account the realities of corporate organisation, it might arguably be an appropriate case that Coco’s insanity can be attributed to Mad House.


It might sound absurd to argue that a corporation without a mind of its own could ever become ‘mentally incapacitated’. It might also seem that the application of the doctrine of mental incapacity to corporations is implausible. As noted, however, the doctrine should apply to corporations, in certain cases, in order to produce just results. In the context of Hong Kong, where there are a lot of private and/or family companies in which there is often a high concentration of real power, one must be aware of the risk that a transaction may be avoided if companies are later found to be lacking in mental capacity by virtue of the mental state of their underlying directors. Whether the court makes use of the opportunity provided in Fortune Asset, to tidy up the law in this area, remains to be seen.


Dantes Leung



在法律上,精神上無行為能力指一個無法明白交易性質及效力的人的思想狀態。精神上無行為能力原則獲法律所承認,作為一項濟助理由,使一項否則應為有效及具約束力的交易無效。因此,在Re Beaney (deceased) [1978] 2 All ER 595案件中,根據轉讓契約所進行的生者之間的餽贈被宣告無效,不具任何效力,因為贈與人精神上無行為能力,未能明白無條件餽贈的性質及效力。不過,合約的情況有所不同。餽贈涉及施予,並無為收受人設定法律權利,而合約涉及商業關係,為雙方設定法律權利,在法律範圍內盡量公平地顧及雙方的責任:參見Errington v Martell-Wilson (deceased)的案件(未經報導)。因此,除非精神上無行為能力的人可進一步證明合約另一方知悉其無法明白合約,否則合約仍然有效:Imperial Loan Co Ltd v Stone [1892] 1 QB 599。


Coco是富裕人士,於山頂購入物業。她並無把物業以其個人名義註冊,而是決定通過該由她出任唯一董事與成員的Mad House Ltd註冊。她通過書面決議,授權自己出售該山頂物業,並代表Mad House作出一項餽贈。她其後精神錯亂,無法理解任何事情。Coco雖然精神上無行為能力,但 以象徵式代價把山頂物業售予一名舊客戶Marco,而Marco充分了解Coco的狀況。同樣地,她指示Mad House把一筆錢交給她的好友Penny,但Penny並不知道Coco精神錯亂。法律應如何處理Mad House的上述交易?



一般的公司法方法對此個案並無幫助,因為問題所在不屬技術上超出公司宗旨、內部不符合規定之處,或董事的委任或資歷欠妥當。事實上,如Coco 以個人身分持有資產及作出交易,解答有關問題輕而易舉,因為精神上無行為能力的原則必定適用。

雖然Coco決定以公司特設機構持有資產,但如法律僅因該原因而剝奪她作為精神上無行為能力的人的法律保障,未免會令人感到意外。因此,基於法律一致性,Mad House等法團獲得的保障,應與精神上無行為能力的人類似,因為此為相關成員(即Coco)最終面對的情況。


精神上無行為能力的董事作為公司代表所具的法律效力,在英聯邦司法體系中從無作出權威性的裁定。可是,Mad House的問題並非遙不可及。事實上,此爭議首次出現在Fortune Asset Development Ltdv De Monsa Investments Ltd [2009] HKCU 1249案件中。此案件當中的De Monsa Investments Ltd是家族性的公司特設機構,作為物業投資用途。在香港的父親劉先生與在印尼的兒子為公司僅有的兩名董事及股東。2007年12月,公司同意從 Fortune Asset Development Ltd購入一些物業,但最終未能完成交易。因此,Fortune Asset根據賣出價的差額損失,就撤銷合約與損害賠償提出起訴。辯方指出簽訂協議的劉先生精神上無行為能力。




代理人原則應用於法團不具爭議性。在上述個案中,Coco精神上無行為能力後,她的實際權限自動終止(參見Bowstead and Reynolds on Agency, 17th ed, Sweet & Maxwell, UK, 2001, [10-002])。為確定Mad House在物業交易的法律責任,Marco必須證明Coco 具有表面權限代表Mad House進行山頂物業的交易,但由於他知悉Coco精神上無行為能力,因此無法證明。至於Mad House對Penny的餽贈,Errington一案中的理論很可能適用,而餽贈應屬無效,理由是實際權限已經終止,不管Penny是否知悉Coco的精神錯亂狀態。

乍看上去,代理人原則的應用給予如Mad House 這樣的法團所需的保障,不過亦有兩項難題。首先,核准交易的法團有逃避的方法。在上述個案中,如書面議決訂明董事會已審議及核准合約擬稿,並授權Coco 以現行方式代表Mad House簽立合約的話,公司可以僅因為所選的代理人其後精神錯亂而違背有關委託嗎?如果(假設性的)所選的另一名代理人一直都精神健全,結果會大為不同;但基於Mad House不管如何均須通過一名代理人行事,這樣的結果是否合理?如合約涉及向各方施加權利與義務,而法律要求心智健全的代理人保障主事人公司的權利,那麼向Penny作出的僅屬簡單資產處置,而經過董事會詳細考慮的餽贈又如何呢?其次,如Marco並不知悉Coco精神錯亂,該合約便將仍屬有效和具約束力,但Mad House可根據合約,就Coco超出權限行事向其提出追索,而該權限乃藉法律的施行而自動終止(參見Bowstead, supra, [6-024]))。奇怪的是,被指超出權限的行為,卻正是Mad House特別委託進行的。

更重要的是,僅引用代理人原則,不能達致公正的結果,除非代理人精神錯亂。在上述個案中,假設書面議決訂明董事會已審議及批准合約擬稿,並授權一直精神健全的經理Samuel而非Coco以現有形式簽立合約。除非Coco精神錯亂可歸因於Mad House,主事人及代理人均精神健全,那末即使Marco知悉Coco精神錯亂,與Marco簽立的合約亦不能無效。此不公正情況,與Coco本身為主事人的情況相比便能顯示出來;Marco知悉Coco精神錯亂的這一事實,足以取代Samuel的任何實際或表面權限。



此原則應用於上述個案時,Mad House應被視為精神錯亂,理由是唯一董事Coco精神錯亂,這是清楚不過的。Marco的合約可使無效,因為他知悉Coco(因而也是Mad House) 精神錯亂,故她並無實際或表面權限。Mad House向Penny作出的餽贈亦同樣無效。即使獲授權簽立合約的是Samuel而非Coco,這仍然可使合約無效:Drew v Nunn (1879) 4 QBD 661。

下一個問題是:把法團視為精神上無行為能力的理據為何(Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500)?似乎只有公司董事會成員心智是否健全是在考慮範圍以內,如董事會的成員越多,公司被視為精神錯亂的可能性便越低。在上述個案中,爭論點是Mad House精神錯亂。如Mad House有兩名董事,而只有Coco精
神錯亂,Mad House仍應被視為精神錯亂,因為欠缺Coco的話,便無法構成法定人數。假如說Mad House有三名或以上董事,而只有Coco是精神錯亂,那麼Mad House乃屬精神錯亂的話,這可能是一種曲解。如Coco在董事會具權威性的地位,而其所作決定一般會獲遵從及同意,則有關案件會更為棘手。董事一方面具有受信責任,行事上須以公司的利益出發:Re Smith & Fawcett [1942] Ch 304。另一方面,撇開受信責任的限制不談,如基於公司機構的現實情況,董事的決定是受到了Coco的影響,則也許可以適當地說,Coco的精神錯亂可歸因於MadHouse。


法團本身並沒有思想狀態,如說成是「精神上無行為能力」,這似乎很荒謬。此外,如精神上無行為能力原則適用於法團,亦屬難以置信的事情。不過,如上所述,該原則應在若干情況下適用於法團,從而達致公正的結果。就香港而言,大量私人及/或家族性公司的存在,當中的權力往往高度集中,如公司其後因有關董事的精神狀態,被發現是精神上無行為能力,這便須關注交易無效的風險。至於法庭是否利用Fortune Asset一案的機會梳理此範疇的法律,這仍有待觀察。




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