Corporate incapacity in trust structures: navigating fiduciary risk and governance gaps

In the fifth instalment of the A Question of Trust video series, the focus shifts to a nuanced but increasingly relevant issue: corporate incapacity and its implications for trusts where companies form part of the trust assets.

The discussion, led by experts in trust law and fiduciary governance, explores how the incapacity of a corporate entity – typically through the incapacity of a key decision-maker – can paralyse trust administration, disrupt trust asset management, and expose trustees to claims that they have failed in their duty to steward or safeguard trust assets.

Unlike individual incapacity, which is often addressed through powers of attorney or deputyship, corporate incapacity is more complex. It arises when a company – often a private investment vehicle or family-owned enterprise – becomes functionally inoperable due to the incapacity of a director. This can occur in companies where decision-making is concentrated in one or two individuals, and succession planning is absent or inadequate.

The video highlights scenarios where:

• A company is wholly owned by a trust (or where the trust has a majority shareholding) and its sole director has lost or is suspected of losing capacity.
• Trustees are unable to exercise shareholder rights effectively due to a lack of information (from the company) or a lack of clarity in the trust deed, following the incapacity of a senior director.
• Trustees are in danger of failing to preserve the value of the company (as a trust asset) due to a reluctance to raise the question of a senior director's capacity (where they might be the settlor or a beneficiary).

These situations can leave trustees in a precarious position, unable to safeguard or realise the value of the trust asset, and potentially exposed to breach of trust claims.

Legal and practical implications

From a legal perspective, the incapacity of a company’s controlling principal can trigger a cascade of issues:

• Fiduciary paralysis: Trustees may be unable to act in relation to the company, especially if the trust deed does not confer sufficient powers or if local corporate law restricts intervention.
• Valuation and liquidity risks: An incapacitated company may be unable to pay dividends, sell assets, or respond to market changes, affecting the overall value of the trust.
• Jurisdictional complexity: Where companies are incorporated in offshore jurisdictions, local laws may not recognise UK capacity frameworks, complicating enforcement or remedial action.

The video also touches on the reputational and compliance risks for professional trustees, particularly in environments where asset oversight is expected to be robust and proactive.

Mitigating the risk

The speakers advocate for pre-emptive governance planning as an effective mitigation strategy. This includes:

• Ensuring companies within trust structures do not have sole directors.
• Appointing multiple directors and giving them different roles so that if one member of the board loses capacity the company does not suffer paralysis.
• Putting in place good governance at board level and robust succession mechanisms.
• Building strong relationships with corporate leaders so that trustees feel able to raise the question of capacity at the appropriate time.

There is also the difficult issue of information: finding a way for the trustees to receive adequate information from the company so that they are aware of issues in a timely manner is imperative. However, one must bear in mind the varying levels of information provided to directors and shareholders as a matter of law and any anti-Bartlett provisions in the trust deed.

Importantly, the video reiterates the need for trustees to treat corporate incapacity as a live risk, not a theoretical one. As family structures evolve and founders age, the likelihood of incapacity increases – and with it, the potential for disruption.

This chapter serves as a timely reminder that trusteeship is not static. Trustees must engage actively with the governance of underlying assets, particularly where those assets are corporate entities. The view that companies are “passive” trust assets is increasingly untenable.

For practitioners, the key takeaway is the importance of scenario planning. What happens if the sole director of a trust-owned company is incapacitated tomorrow? Who steps in, and under what authority? These questions should be asked – and answered – before crisis strikes.

As trust structures become more complex and global, the intersection of corporate governance and fiduciary duty will only deepen. Trustees, settlors, and advisers alike must ensure that their structures are not only well-stewarded but also resilient in the face of incapacity.

A Question of Trust - watch the full series now

Loss of capacity of those involved in trusts is an increasingly prevalent legal issue, and a growing cause of disputes.

In this video series, we bring together international experts to explore the issue of capacity, how to mitigate risk, pragmatically address this sensitive topic, and provide practical insights and guidance for fiduciaries.

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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2025