A question of capacity

The High Court has considered the correct test to be applied to assess a person’s mental capacity to enter into a transaction. The case (Fehily v Atkinson [2016] EWHC 3069 (Ch)) arose when Mrs Fehily, along with her husband and two former business partners, entered into individual voluntary arrangements (IVAs) to discharge a debt for unpaid tax due to HMRC. Mrs Fehily failed to comply with her obligations under her IVA and, as a result, a bankruptcy order was made against her. Mrs Fehily subsequently challenged the validity of the IVA on the grounds that she did not have mental capacity to enter into the IVA and therefore it was ineffective.

A voluntary disposition, such as a will or deed of gift, is void if the person entering into it lacks the requisite mental capacity to understand the transaction. A contract entered into by a person without the mental capacity to understand the transaction will be voidable if the other party knew that a party lacked mental capacity. In those circumstances, the incapacitated person has the right to rescind the contract. However, if the other party was not aware of the lack of capacity, the contract will be valid and binding.