Removal of a director

Shareholder & director interaction

A limited company is run on a day to day basis by the directors, who make all the general decisions required in running the company. Therefore, the removal of a director may be necessary to maximise the benefits to the Company shareholders when

• The director is underperforming; or
• he / she is not acting pursuant to the agreed Company strategy,

The removal of a director can, however, be wrongly used by business owners during a dispute to apply pressure or leverage in negotiations regarding share value or terms for one owner’s exit.

Where a Company fails to follow the correct process for removing a director it can be costly both in terms of cost and time. Ensuring that the proper process is followed is therefore key.

Who can remove a director?

The procedure for removing a director varies from company to company. Generally speaking there are a number of alternatives:-

• the power to remove a director is often reserved to the board of directors: or
• the decision to remove a director is reserved to the shareholders in the articles of association (filed at Companies House) and / or a shareholders agreement (not filed at Companies House).
• where the power is not expressly set out in the articles of association or shareholders agreement, there is a statutory process set out in the Companies Act 2006 that can be followed. 

Shareholders powers to remove a director

Using powers in the articles of association or shareholder agreement

The company will need to follow any process expressly set out in their articles of association or shareholders agreement.

• service of written notice is required, and
• the period of time required for the notice will either be expressly set out in the articles of association / shareholders agreement or be subject to the provisions of the Companies Act.

The Company should also check whether certain shareholders have been granted enhanced voting rights on a resolution to remove directors, in either the articles of association or shareholders agreement.

Using statutory powers

In the absence of powers set out in the articles of association or a shareholder agreement, a director is removed using the statutory procedure set out in the Companies Act 2006:

• the shareholders proposing the resolution must serve special notice on the company of the proposed resolution to remove the director,
• that notice must be given to the company at least 28 “clear” days before the meeting at which the resolution will be heard;
• once the company itself has received the shareholders notice, the company must send formal notice of the meeting to all shareholders within 21 days from receipt by the proposing shareholders;
• when a company sends notice of the meeting to shareholders, it is usual for notice of the proposed resolution to be included at the same time;
• if for any reason this isn’t possible, then shareholders need to be given at least 14 clear days’ notice of the resolution before the meeting itself. Because this is a serious and unusual resolution that affects both the company and the director, there is debate surrounding whether it is appropriate for short notice procedure.
• The shareholders must pass an ordinary resolution at a meeting of the company. This will need to be passed by a majority.

Once the resolution has been passed, form TM01 would need to be filed with Companies House to notify the registrar of the director’s removal.

If the statutory process is not followed correctly, the director will be able to challenge their removal. On this basis, seeking advice from experts before providing written notice to a director you wish to remove is key. Similarly, if you are a director who has been notified of a resolution to remove you as director, we would recommend you seek advice immediately because you may be able to challenge any decision to remove you. We have successfully done so for many clients.

Reasons for removal

There does not need to be any breach of directors’ duties in order for shareholders to remove a director. This remedy may be particularly useful to a majority shareholder who, for one reason or another, does not like one (or all) of the directors of the company.

Compensation to directors

Following the removal of the director, a director may be entitled to compensation for loss of office.

• where a director is removed from office, the company must follow certain statutory steps before making a payment to the exiting director for loss of office;
• if the director is compensated for their loss of office, any payment must be approved by the shareholders before being made to the exiting director.
• shareholders will need to pass an ordinary resolution (by a simple majority) that this payment has been approved. In order to do this, the shareholders must be provided with a memorandum clarifying the payment(s) to be made to the director, and the reasons for the payment.
• once a resolution is passed, then a clear record should be kept in the company’s books and records of the reason for the payment and the shareholders’ resolution approving the same.

Where the Company fails to follow the required statutory steps, the payment to the exiting director will breach the provisions of the Companies Act 2006 and it shall

• be held by the exiting director on trust for the Company and
• the director who authorised the payment to the exiting director may be jointly and severally liable to indemnify the Company for the loss arising from the Company’s breach of the Companies Act 2006. 

Directors’ employment rights

A director is usually also an employee of the company. If a director is successfully removed by a shareholder vote, then the company must also deal with the removal of the director as an employee.

• this means ensuring that the director’s employment rights are dealt with correctly to avoid an employment claim against the company by the director.
• advice should be taken regarding a director’s employment rights to avoid an employment claim against the company, even where the correct process has been followed to remove the director from office.

The starting point will be for a Company to consider whether the director has a director’s service contract, employment contract or shareholders agreement that also contains provisions about the director’s employment.

What if the director is also a shareholder?

Removal of a director, who is also a shareholder, can be grounds for the shareholder arguing that the affairs of the company are being conducted in a manner which is unfairly prejudicial to them. Their removal can form the basis for an unfair prejudice petition against the particular shareholders who are guilty of unfair conduct and also, the company itself.  

Where the company is a quasi-partnership, it is more likely that the shareholder will be able to successfully argue that their removal as director is unfairly prejudicial to their position. What constitutes unfair prejudice has been the subject of significant case law and advice should be taken regarding whether removal of a director is likely to give rise to a successful unfair prejudice petition and what risks any such petition represents.   

Shareholders powers to bring action against a director

The directors of a company have certain statutory and fiduciary duties to comply with while undertaking their role. An example of this would be the duty to promote the success of the company for the benefit of its members. These duties are listed in sections 171 to 177 of the Companies Act 2006.

Should a director breach one of these duties, be negligent, breach trust or fail to follow their obligations under the Company’s constitution (e.g. Articles of Association), the shareholders have certain remedies available to them such as;

• removing the director from office (after following the correct process)
• step into the shoes of the company and bring a derivative claim, on behalf of the company, against the director(s).
• if a minority shareholder is being prejudiced by the actions of the directors, bring an ‘unfair prejudice’ claim seeking relief against the directors’ actions.
• the shareholders may also seek to wind-up the company on a “just and equitable” basis.

Directors relief from liability

If you are a director and find yourself being targeted by the company shareholders with allegations pertaining to negligence, breach of duty, or breach of trust etc…, you also have rights and potential remedies to explore.

• there is an overarching provision of law contained in Section 1157(1) of the Companies Act 2006, which provides that the court may relieve the director of any breach if the director acted honestly and reasonably and, having considered the circumstances, the director ought to be excused. This is essentially a wide discretion for the court.
• a breach can be ratified by resolution of the members of the Company under section 239 of the Companies Act 2006. This section provides a procedure that needs to be followed if the conduct is to be validly ratified.

Directors and Officers Insurance (“D&O cover”)

It may be worth considering whether insurance ought to be taken out to protect a Company’s directors against alleged wrongful acts. This is normally referred to as a ‘Directors’ and Officers’ insurance policy and is permitted by Section 233 of the Companies Act 2006.

Where a director has been unlawfully removed, he or she should check any insurance policy held to see whether their legal costs will be paid under the insurance policy.

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If you are a shareholder wanting to remove a director, or a director facing removal from office / who has been removed from office, then please contact a member of our expert team at Francis Wilks & Jones. Our team have many years of experience in these proceedings and can walk you through the correct procedure and discuss the ramifications with you.

Or simply call Maria Koureas- Jones direct for immediate help.

If there was ever a star rating for law firms, Francis Wilks & Jones would score five stars plus. Professional and pro-active, they were able to understand my problem quickly, provide expert advice, outline a solution and put it into place with a successful outcome. I should have gone to them sooner.

A company director we acted for.