Removing a director from office – company law

21/12/2016

Edward Garston, company law expert explains how to remove a director and how a director may automatically lose his position.

Relationships in business can break down and companies often need to take a different direction necessitating a change in management, especially if one of the directors is not acting in a way that promotes the success of the company.  

Before considering what route to take, you must always ensure that your reason for removing the director is fair, or you could find yourself facing an employment tribunal claim for wrongful dismissal and a hefty compensation pay out.

How many directors should there be?

A private company must have at least one director and a public company must have at least two at all times. There is no legal maximum number of directors, but all directors must be over 16 years old.

Special considerations where a director is also a shareholder

Where the director being removed is also a shareholder, removal from office will not usually affect their shareholding and voting rights. In small private companies, where a director is often a shareholder, it is advisable to hold negotiations for the purchase of the ex-director’s shares. Alternately, it may be wise to insert a clause into the articles of association that a shareholder who ceases to be a director is deemed to have given the company a transfer notice in respect of his shares.

Removal by ordinary resolution

A director can be removed by an ordinary resolution of a general meeting under section 168 of the Companies Act 2006. The director can be removed before their period of office has expired, regardless of any other agreement to the contrary.

The company will need to serve a special notice of its intention at least 28 days before the meeting, or the resolution will be invalid. The company must also give notice of the resolution at the same time and in the same manner as it gives notice of the meeting.

The company must forward a copy of the notice to the director concerned, who is entitled to make representations at the meeting. The director can make representations in advance in writing and if they do the company must send a copy of those representations to everyone who was sent notice of the meeting.

The ability to remove a director by ordinary resolution cannot be excluded by the company’s articles of association. However, it can be avoided rather easily by inserting a clause into the articles conferring additional voting rights on the director who is about to be removed, with the consequence that the director can prevent the resolution from being successful. This is only effective where the director to be removed is also a shareholder.

Removal and resignation under the articles of association

The terms for removing a director in the articles of association will differ depending on the company concerned. However, the model articles are the default provision for companies incorporated after 1 October 2009, and will come into effect if the company does not register its own articles.

Article 18 of the model articles provides that a person ceases to be a director:

  • by virtue of any provision of the Companies Act 2006 or where they are prohibited from being a director by law;
  • a bankruptcy order is made against that person;
  • a composition is made with that person’s creditors generally in satisfaction of that person’s debts;
  • a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and is likely to remain so for more than three months; or
  • notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms.

Commonly, further grounds are inserted into the articles so that it is more straightforward to remove a director. 

Directors’ disqualification

The civil and criminal courts have the power in certain circumstances to disqualify individuals from exercising management functions in relation to any company. Breach of a director’s disqualification order is a separate criminal offence.

A director’s disqualification order will disqualify the individual from doing any of the following without the permission of the court:

  • acting as a director of a company; 
  • acting as a receiver of a company’s property; 
  • being concerned or taking part (indirectly or directly) in the promotion, formation or management of a company; and 
  • acting as an insolvency practitioner. 

A civil court can make a disqualification order against an individual who has been a director of a company which has become insolvent , while they were a director or subsequently, and where the court believes that their conduct as a director of that company makes them unfit to be concerned in the management of any other company in the future.

A criminal court can disqualify a person from being a director if they have been convicted of certain offences in connection with the management of a company.

Depending on how a director is disqualified, it may be necessary to take further action.

If a sole director of a company is declared bankrupt, for example, the company will be wound up. In these circumstances the official receiver may liquidate the company and sell any assets.

If a company has multiple directors, the disqualified director should inform them immediately and resign their position. If a director becomes bankrupt but fails to notify the other directors, they could be removed by virtue of a motion being passed by the other directors. In the event that the bankrupt director owns more than 50 per cent of the shares, the official receiver should be notified in order that the relevant legal action can be taken.

A court can order a director’s disqualification and can also give permission for a disqualified director to act in relation to a particular company. As circumstances vary widely it is always advisable to take specific legal advice.

MORE INFORMATION 

If you need advice on removing a director from office or have any other company law problem, please contact Edward Garston, a Senior Associate in the Company Commercial Department. Call on 01708 229444 or email edward.garston@pinneytalfourd.co.uk

This article was written by Edward Garston, a company commercial solicitor at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at December 2016.

21/12/2016

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