A director is an anchor that helps a business perform its day-to-day activities. The role, however, comes with a few sets of responsibilities and duties that the director must perform. These duties should be undertaken in the best interests of the company and the shareholders. If the shareholders have a feeling that one of the directors is not providing up-to-the-mark services or has some personal agenda, they have the authority to move towards the removal of the said director if they decline to leave voluntarily.
What Might Cause A Director To Be Removed Or Disqualified?
There are a number of reasons where a director might be considered unfit to fulfil their responsibility as a director or be disqualified from that position. If you have been running a business and think that your directors might fall under one of these situations, then you would need to consider subjecting them to corrective actions or in the worst-case scenario, shift to the decision of having them removed from office.
According to the law, a director would immediately have to leave the office in this case.
- Of Voluntary Resignation
- If an Ordinary resolution is initiated by company members.
- If an order is from the court of law.
- Of bankruptcy.
- If a properly registered medical practitioner declares the person mentally or physically incapable of conducting their duties.
Unfit for Business By Law
As mentioned above, a director can also be removed from office on the basis of a legal notice provided by a court of law. A director needs to be removed if they have been deemed unfit for business by law, which can be any of the following cases.
- Continuing to trade to the detriment of creditors when a company is insolvent.
- If they have failed to keep proper books of account.
- They have failed to prepare and file annual accounts and/or confirmation statements
- They have failed to deliver tax returns and/or pay tax liabilities to HMRC
- And if they have failed to co-operate with an insolvency practitioner or the Official Receiver
Other cases that might cause a director to be removed would be in the case of disqualification, which can occur if they:
- Do not meet the minimum age requirement of 16
- Have been declared bankrupt or have been subjected to any bankruptcy proceedings
- Have served along with the Debt Relief Order
- Continued to trade when a company is insolvent (unable to pay its bills)
- Used the company’s finances or assets for personal benefits
- Failed to maintain statutory duties as per the Companies Act 2006
How To Remove A Company’s Director?
There are various ways that can be employed to initiate the removal of a director, some more forceful than others depending on the situation under which they have been opted for. However, here, we will look at all of them and how they can be undertaken.
Removal By Ordinary Resolution
Subject to special circumstances, a director can be removed from office by an ordinary resolution as stated in the following provision of the Companies Act 2006.
“CA 2006, sec168 (1) A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.”
“(2) Special notice is required of a resolution to remove a director under this section or to appoint somebody instead of a director so removed at the meeting at which he is removed.”
“(5) This section is not to be taken (a) as depriving a person removed under it of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director, or (b) as derogating from any power to remove a director that may exist apart from this section.”
As stated above, if you initiate an ordinary resolution, you would need to deliver a special notice to the company at least 28 days before you move with the removal of the director. The director, receiving the notice, will then have to call up a meeting and hold the meeting within these 28 days. In the case of an obstructive director, the Companies Act states that the removal can be brought into effect even if the 28-day period hasn’t elapsed.
Meeting
A meeting is set up when a company’s director is notified of removal by ordinary resolution. This is done in order to provide the director with a fair chance of defending his position and providing a solid reason behind their performance. The meeting acts similarly to a stakeholder meeting; however, the purpose of this one is to remove any uncertainties from the procedure and allow the director to provide a verbal and written statement regarding their position. Unless the resolution has come to pass due to the order of the court, it is stated that the director should be heard and their requests should be acknowledged. According to the Companies Act, a director who is to be removed should be provided with compensation or damages payable to them despite their termination.
The director can also be replaced by another one at the same meeting; however, do note that this requires special notice as well.
Retirement By Rotation
According to the law stated in the Companies Act, at every annual general meeting, almost one-third of the total number of directors must relinquish their authority and retire from office to be part of the re-election for the position. Shareholders, as the voting authority, can remove the director by simply not voting for them to be re-elected. However, note that a person with the authority of an executive director is exempt from this condition and is not required to retire under any law.
Disqualification By The Court
The removal of a director does not rest solely with the shareholders of the company, as the court of law can remove a director as well if it considers them to be unfit to fulfil the role of a director. However, the court will only move to have a director removed or disqualified if the director is considered to be ineligible to fulfil the role of a director, which can be in the following situations.
- If the director pushed the company to be involved in trading even after being considered insolvent.
- The director has committed a crime that relates to running a company.
- The director has repeatedly offended the laws set up by the Companies Act and has failed to prepare the required documents.
Removal Under The Articles
Most companies, when writing up their legal documents, add conditions under which a director can be removed. However, to go along with that is a very unusual practice as most directors will take note of these documents and actively avoid making those mistakes. However, it is always a good idea to have certain clauses in your articles of association regarding the procedure that will be followed if a certain offence is committed.
Note that if you are a director and feel like you are being wrongfully put through a trial, you can check the articles of association from the Companies House website and make sure of the allegations and the process they entail.
Employment Status Of The Director
The director’s employment status does not affect the decision to have them removed from the office; however, it may affect the company’s environment, as working with an ex-director who has been removed can be a little distasteful.
Unless stated explicitly in the articles of association, the director who has been removed can not be asked to leave their position as an employee unless proper justification is provided for the dismissal. If the company dismisses the person from the position, it can hold the company accountable for unfair dismissal in front of a court of law. Similarly, a director cannot be removed from office if their status as an employee has been terminated unless it has been stated clearly in the articles.
Unfair Prejudice
An Unfair Prejudice claim can be filed by a shareholder if a director that is also a shareholder is removed by the shareholders. The shareholder can petition against the company affairs if they feel that the business affairs are being conducted in an unfairly prejudiced manner towards its shareholders. Over the years, the court has deliberated over what could be considered unfair prejudice and has addressed the petitions based on scenarios. In case the prejudice is evident, the court can order the reinstatement of the removed director or may ask other shareholders to buy the number of shares held by the removed director at market value.
Can Directors Remove Another Director?
According to the Companies Act 2006, only the shareholders have the power to move towards the removal of a director unless the articles of association allow the board of directors to have such power. The model articles provided by the Companies House and followed by startups do not include such provisions and can only be added after amendments. However, to proceed with such a clause, the directors must ensure that they do not abuse this power and adhere to their duty of acting in the company’s best interest.
Director’s removal without Consent?
You do not require the consent of the directors before proceeding with their removal though you might have to follow any amended clause in the company’s articles of association that states otherwise. There are further provisions for directors’ removal if they breach the terms of the service agreement. Even if there is no such clause, the Companies Act 2006 allows a director to be removed from office via ordinary resolution.
Conclusion
Removal of a director only occurs in desperate circumstances, as it has a lot of conditions that you need to comply with. Additionally, you would need to report all such changes in the company’s management to the Companies House with proper documentation and legal proceedings. However, it is still an important step that allows you to work towards the future that is most favourable for the company. This is why it is advisable to get the help of a business advisor who is able to provide you with the best course of action and allow you to get through the whole process effectively and efficiently.
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