When, why and how to remove a company director.

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Our solicitors offer experienced legal advice for both companies and directors in the sensitive and difficult situation where a director decides to or must resign or be removed. Speak to us for an initial opinion.

As a director, any actions must be in the best interests of the company. Directors are accountable for their actions, and must ensure that they collectively deal with a wide variety of issues with the ultimate aim of ensuring compliance with the aims of the company. The position of director is one of great responsibility and comes with certain expectations from board members and shareholders alike.

 Employment Law – director may also be employee 

It is important to note that the removal of directors under statute or otherwise does not negate any rights held under relevant employment law. If the director is an employee of the company and is dismissed as well as removed as a director or is able to resign and successfully claim unfair dismissal, there are risks of wrongful or unfair dismissal.

Employment law still applies irrespective of whether the company’s articles of association and/or company law statute have been complied with so it is important to follow correct employment law process. In addition to this, a further complication may arise if the director is also a shareholder. In such situations, the director may apply for a court order under Section 994 of the Act on the basis that the removal was unfair and caused harm to the shareholders or otherwise.

 Companies House formalities relating to removal of director 

Once a director has been removed, Companies House must be notified. The procedure is, in accordance with section 167 of the Act, completion of form TM01. This removal of director form is titled Termination of appointment of director, and can be filed online. The form requires confirmation of company details, director details and official date of termination.

 Company law and directors duties 

There are specific duties detailed in the Companies Act 2006 (“the Act”), which came into force on 8 November 2006. The Act deals with a wide variety of issues, including reporting, shareholder communication requirements and specific fiduciary duties of directors.

These duties include the requirement for directors to act in the interests of shareholders and employees, the way in which relationships with suppliers, customers and third parties should be conducted as well as several other statutory duties. The Act also explains the specific powers held by directors and subsequently the consequences of any breach of directors’ responsibilities.

 Removal of Director under statute 

The Act also deals with the statutory procedure for removal of a director from office where the company does not otherwise have a set process, such as contained in it’s articles of association (see below). This procedure for removing directors was previously covered by the Companies Act 1985 and is now set out in sections 168 and 169 of the Act.

Under section 168, a director may be removed at any time by the passing of an ordinary resolution. If a shareholder wishes to propose such a resolution, special notice of this intention must be given at least 28 days before the meeting at which the resolution is being motioned. A copy of the resolution must also be sent to the relevant Director. Once this notice requirement has been met, the shareholders must hold a general meeting in order to discuss the decision and decide whether or not the director should be removed.

At this general meeting, the Director concerned has the right to speak or make written representations. The decision is based on whether or not the resolution for removal of the director receives a majority vote.

 In practice 

The duties set out by the statute are a set of principles since no piece of legislation could set out every type of situation which a director may encounter. Much of the task of complying with the fiduciary duties is common and moral sense but there are inevitable grey areas where a director, if in doubt, should certainly explain his or her predicament to the other directors and seek their opinion or counsel, or where the issue cannot be addressed in that way, is highly personal or sensitive, outside counsel is recommended such as from specialist corporate solicitors.

Companies can make their own rules about how to remove a directors via articles of association.

 Articles of association and director removal 

Many articles of association will outline a number of circumstances under which a director can be removed or is deemed to have been removed. Such examples include prolonged absence, when a director is declared bankrupt or suffers from a condition which means that the role can no longer be performed.

The articles of association should also confirm certain procedures for removing directors including a provision that a director can be removed upon majority agreement. There are sometimes provisions within the articles of association that state that section 168 and 169 of the Act (as detailed above and concerning the removal of directors under statute) are excluded from applying to the company.

Such a provision is not lawful and will therefore be unenforceable. The only situation in the articles of association which may affect the removal of director under statute is where certain individuals are provided with enhanced voting rights. In such a case, it may mean that a majority cannot be reached when attempting to remove a company director from office.