When considering the dismissal of any employee there are a number of factors that must be taken into consideration and correct procedure must be followed.
Is the director an employee?
A key question to begin is – is the director an employee? Some directors are employees and some are self employed. It is likely there will be a contract which makes this clear but care should still be taken because with employment law, the “label” on a contract may be overruled at court by a finding that the reality of the situation was different. In cases of doubt, a good starting point is to consider what is known as the “control test”.
With directors who are employees there are even more procedures that must be complied with and therefore it is even more important that the correct process is followed.
In addition to reasons for dismissal which may apply to any employee such as capability, conduct or ill health, consideration of dismissing a director may also involve specific fiduciary or other duties directors have.
Companies Act 2006
Being a director is a position of responsibility and carries expectations and obligations.
Specific principles that arise from being a director are now contained in the 2006 Companies Act (“the Act”) – useful overall guide here. The Act covers a broad range of issues such as reporting, conflicts of interest, communications, acting in the best interests of others, supplier relationships, disclosure and conduct. The Act also contains a number of other statutory provisions that directors must adhere to and deals with breach of duty and repercussions of such breaches.
Notwithstanding the extra responsibilities on directors, before a dismissal where the director is an employee, if the breach is a first offence, it is not safe to assume it will automatically give grounds for a gross misconduct dismissal. Legal advice should be sought in most cases of a serious breach and employment law process must still be followed.
Perhaps most importantly in this context, the Act outlines the process relating to the removal of a director – see here. Under Section 168 and Section 169 of the Act the requirement for an ordinary resolution for removal is discussed in more detail alongside the specific notice periods and several other factors such as when the information must be presented and what needs to be done at the following general meeting.
Articles of Association and director dismissal
Whilst not obviously an employment law issue, it is important to ensure that removal of a director is in accordance with the Company’s articles of association. This ties in with the overall importance, when dismissing an employee, to comply with appropriate process, especially an established and documented internal process. A failure to do so may be considered as indicative of a failure to act reasonably and fairly.
Failure to comply with articles can also give rise to other issues. For example, the shareholders may be divided or polarised about dismissing a director, especially if the shareholders are also directors or where a director has been appointed initially with specific support of some of the shareholders.
Employment Law on dismissing a director
As previously mentioned, there is much legislation in place with regard to the potential dismissal of an employee. It is often the case that a director is an employee of the company and therefore all relevant employment law rights still apply. This means that the removal of a director may lead to a termination of an employment contract (depending on the circumstances) and this means that there may potentially be a claim for unfair dismissal or other relevant employment legislation (as per the facts in question at the particular time).
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