There may come a time when you want to remove a director from your company, for example if they are guilty of misconduct or simply neglecting their duties. These situations can be tense and it is important to follow the removal procedures correctly in order to minimise the risk of future legal disputes. Here at Harper James, our legal experts can discuss and advise you on the best route to achieve the removal of a director. In this guide, we walk through the various options available to remove a director from a private company.
Contents:
- How to remove a director under the company’s articles of association
- How to remove a director by voluntary resignation
- How to remove a director by an ordinary resolution
- How to remove a director using the courts and in law
- Other ways in which a director’s appointment can end
- Removing a director if they are also an employee
- Can a director be disqualified?
- Can you resign if you’re a sole or co-director of a company?
- Notifying and changing directors’ details at Companies House
- Implications for company directors and existing share schemes
- Assistance with removing a company director
How to remove a director under the company’s articles of association
If you’re thinking of removing a director, the first document you need to consult is the company’s articles of association. This document is, in effect, your company’s rule book, setting out how the company will be run and structured. It often contains provisions that dictate how directors should resign or be removed from office. A company's articles will usually set out certain events or circumstances, the occurrence of which will result in the director’s appointment terminating automatically. No further action or resolution will be needed for the removal and the other directors cannot waive the event or circumstance.
A company that doesn’t have bespoke articles usually have standard articles known as ‘model articles’.
Under article 18 of the model articles, a person will stop being a director immediately if:
- they resign
- a majority of the company shareholders vote them out by ordinary resolution
- they’re stopped from being a director by a court or in law
- they become bankrupt or similar
- they become physically or mentally incapable in the opinion of their doctor and may remain so for more than three months.
Bespoke articles may include further provisions setting out the removal of a director upon termination of the director’s service agreement or in the case of gross misconduct.
In conjunction with the articles, you should also check the provisions of any shareholders’ agreement and service agreement, as these documents often contain additional or more detailed terms around the termination of directors’ appointments and the consequences of such termination.
We can help you put the pieces of the puzzle together to make sure all relevant documents are considered and then decide upon the best course of action.
How to remove a director by voluntary resignation
Provided that the company’s articles don’t say otherwise, a director can voluntarily resign by notifying the company and their co-directors that they’re resigning.
They’ll have to follow the procedures set out in the articles, director’s service agreement and if relevant, shareholders’ agreement to see how they send the resignation notices, to ensure that the resignation is valid and effective.
How to remove a director by an ordinary resolution
You can remove a director before the end of their term of office by passing an ‘ordinary resolution’ of the company’s shareholders, even if this wasn’t what was originally agreed between the director and the company. An ordinary resolution is a resolution of the shareholders (or of a class of shareholders) of a company, passed by a majority of the eligible voters present at a shareholders’ meeting. The right to remove a director in this way will continue to apply even if there has been an attempt to exclude it in the company’s articles or any service agreement.
If you’re proposing to remove a director by ordinary resolution, the company’s board of directors will need to send the shareholders what is known as a ‘special notice’ of the proposed resolution to remove a director at a shareholder’s meeting. This notice is ‘special’ because you need to give extra notice than is usual for shareholder meetings.
If the removal of the director is time sensitive, you should factor in any additional timeframes for circulation of the notice, as the resolution to remove the director can only be passed at a meeting and not by way of written resolution. You must also send a copy of that notice to the director you are proposing to remove.
Post COVID-19, many companies have decided to hold ‘hybrid’ meetings of those present in person and virtually. If, in order to meet your timeframe, you want to hold a ‘hybrid’ meeting, guidance suggests that you can pass an ordinary resolution in a hybrid meeting, even if your articles don’t expressly allow it, provided the articles don’t require that members be physically present or prohibit electronic participation.
The director can be replaced by a new director at the same meeting, but it should be noted that this also requires its own special notice.
Once a director has been notified of a company’s intention to end their term by way of ordinary resolution, the director is entitled to respond and to be heard at the meeting.
A director can make written representations to the company in support of their case and can ask that these are sent on to the company’s members. If this isn’t possible or doesn’t happen, the director can ask that the representations are read out at the meeting. It’s advisable to comply with the director’s requests to ensure that there is no question as to the validity of the resolution passed.
Even if you terminate a director’s appointment, you may still need to pay them any compensation or damages they’re owed, despite the termination of their appointment.
If the director holds any other position that will be terminated at the same time as their role as director, for example if they also hold the position of treasurer, they may also be entitled to compensation or damages payable to them in respect of that position.
Such payments may be agreed by way of a settlement agreement between the company and the director. Please get in touch with us if you would like advice on the implications of a settlement agreement.
How to remove a director using the courts and in law
A director’s appointment may be terminated by court order or because of a provision of law. There are various directions and orders that a court can make to stop a person from being a director, including where a shareholder alleges that the director is running the company in a way that is or could be unfairly prejudicial to the interests of some or all of the members.
A person can’t be a director if they’re going through the process of bankruptcy, or if a bankruptcy restrictions order or a debt relief restrictions order is in force against them. Also, someone cannot be a director if they are the subject of a moratorium period under a debt relief order or if a failure to pay under a county court administration order is made.
Usually the articles of a company will set out what happens if a director is removed in these ways. In many cases, the person will stop being a director immediately.
A company can still be bound by the acts of a director that has been removed. The acts of a person acting as a director will continue to be valid, in spite of the fact that the act occurs after it was discovered that the director had ceased to hold office.
Other ways in which a director’s appointment can end
As well as by resignation or by shareholders’ ordinary resolution, a director can be removed in a variety of other circumstances. If a director dies, they will automatically be removed from the position of director. If this happens, the company can then decide whether to appoint another director to replace them.
Directors can be appointed for a fixed term that may be set out in the company’s articles or in an individual director’s service agreement. When the term ends, the director’s appointment automatically terminates.
Removing a director if they are also an employee
Unless stated otherwise by the company’s articles, a director can continue to hold their office even after their employment has been terminated. However, as you might expect, this is not usually something that the business wants. To prevent an employee remaining a director, director’s service contracts can provide that the termination of their employment will automatically trigger a requirement for them to be removed or resign from the office of director.
In the case of removing a director who is an employee, we advise you to get in touch with us for legal advice on the employment, pensions and tax position surrounding this situation and its consequences.
Can a director be disqualified?
Yes. Directors have general duties that they legally owe to the company as a result of their appointment as an officer, which include a duty to act within a director’s powers to promote the success of the company and to exercise reasonable care, skill and diligence.
In certain circumstances where they’ve not fulfilled these obligations, for example, they’ve committed fraud, broken company law , or been convicted of a serious offence, a court can make a disqualification order against them to stop them becoming or remaining a director for a period of up to 15 years. Read a full list of matters to be taken into account when determining the unfitness of a director.
A director can also be disqualified and prohibited from acting as a director if they are declared bankrupt or are subject to bankruptcy orders or have been found guilty of continuing to run a business when they knew or ought to have known that insolvency was inevitable (wrongful trading).
If a director is seen to have been neglecting their duties, there are a few ways in which they may be protected, if they’ve been validly acting on behalf of the company. It’s also common for a company to hold insurance policies that will provide protections for its directors. A court can also relieve a director either wholly or partially, from liability if it believes that there are reasonable grounds for doing so and it looks like the director acted honestly and reasonably.
Can you resign if you’re a sole or co-director of a company?
Both a sole director and a co-director can resign from office, however, a private company must always have at least one director. The law also states that a company must have at least one director who is a natural person, i.e. not another company.
It therefore follows that the removal or resignation of a sole director will require further action by the company. A new director will need to be appointed before or at the same time as the resignation or removal. A company’s articles will usually make provision for the appointment of a new director following the end of an existing director’s appointment. The model articles state that a director may be appointed either by way of ordinary resolution or by a decision of the other directors (if there are any). The model articles also address the situation where, as a result of death, the company has no shareholders and no directors, in which case the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director.
Also, the removed director will still have continuing legal obligations. A person who stops being a director will continue to be bound by:
- the duty to avoid conflicts of interest in respect of the exploitation of any property, information or opportunity that they became aware of at a time when they were a director
- the duty not to accept benefits from third parties in relation to anything they did or did not do before they ceased to be a director
- confidentiality obligations that they will have been subject to during the course of their term in office.
Notifying and changing directors’ details at Companies House
Once you’ve removed a director, you must notify Companies House of the change:
- a company must notify the registrar of companies of the removal of or resignation of a director within 14 days from a person ceasing to be a director
- notice should also be given to the registrar if there is any change in the details of a company’s register of directors or its register of directors’ residential addresses, and the date on which the change occurred
- a company will need to file a TM01 form either online or on in paper form.
If these requirements are not complied with, an offence will have been committed by the company and its directors and company secretary, and they may be fined as a result.
New law is currently being brought into force with regards to the verification of the identity of directors and their registration at Companies House. This new law is also going to expand the grounds for director disqualification. If you would like more information on these changes, please get in touch with our corporate law team.
Implications for company directors and existing share schemes
Many directors will hold shares in the company, sometimes as part of a company share scheme. As with all share schemes, the implications for departing directors will depend heavily on the reason for their departure and whether they are classed as a ‘good’ or ‘bad’ leaver. Directors who leave on hostile terms will be classed as ‘bad’ leavers and will typically lose the benefit of any options upon departure.
Share schemes will often include provisions for the exclusion of employer’s liability for loss of share scheme entitlements following an unfair dismissal claim. They also sometimes include clawback provisions if the company considers a director to be a ‘good’ leaver and later discovers misconduct. Such provisions will need to be considered in light of the terms of any potential settlement agreement.
Assistance with removing a company director
Here at Harper James, we have experienced teams of lawyers who can advise on the options and procedures for the removal of a director to minimise the risk of future disputes, including guidance on employment law issues, settlement agreements and share schemes implications. We have negotiated many director exits and are happy to advise directors considering the removal of a co-director as well as company directors facing forced removal.
