Can a director be forced out?
Every director wants to feel secure in their position, but there is always the potential for disputes further down the line.
It’s vital to ensure that you’re happy with your Articles of Association. This document sets out your company regulations and is something you’ll file with Companies House when you first incorporate.
If a disagreement arises between shareholders and directors, it’s the Articles that determine the rights of the board, or a majority owner, to force out a director.
So, the answer to the question is: Yes, a director can be forced out – but the exact scenario depends on the protocols you establish from day one.
Forcing out a director in a commercial dispute
In the middle of serious discord, forcing out a director is usually the last potential solution. It’s inevitably going to cause disruption for everybody involved.
As business dispute solicitors, we’d recommend seeking professional guidance to ensure there isn’t a more suitable resolution strategy before going down this route.
Some of the primary reasons a director can be asked to surrender their post include:
- Bankruptcy, or a situation that compromises the integrity of the business
- Ill health or a change in mental capacity, leading to being unable to fulfil the role
- Legal factors, such as disqualification
- Breaches of the service contract
- Absence from company board meetings for six months without permission
That list isn’t exhaustive, but many of the reasons a board might decide to take action arise from scenarios where it isn’t tenable for the directorship to continue.
The practicalities of forcing a director to resign
We’ve mentioned service contracts above. The first port of call is to look at the agreement between the business and the director.
Many start-ups rely on template Articles of Association or generic contracts, but that’s rarely sufficient to cover the depth of detail you need to make sure every director meets the needs of the business.
Model Articles (the default template provided by Companies House) provide zero guidance for removing directors, so there isn’t any express provision to help guide you through the process, which means you’ll need to come up with your own way of working through the process. And ideally you sort this out before the issue ever arises.
For example, you could examine the advantages of zero-hours contracts to take on senior roles as required on an ad hoc basis.
Your enterprise will likely then assess the disadvantages of zero-hours contracts and whether the lack of commitment on either side will be the right option for your business growth plans.
That assessment is even more critical for directorships since it will dictate what you can and can’t do if it becomes crucial to terminate a position.
Statutory removal procedures for directors
If you’ve gone with the Model Articles, which offers no guidance on the removal of a director, then you’ll need to refer to the Companies Act 2006, which offers two primary ways to remove a director:
- Through a legal process in the courts to force a resignation
- Filing an ordinary shareholders resolution
For the latter, your business would need to follow a defined series of steps to ensure the termination is legally valid. Doing so allows you to take action against a director for breach of contract later on.
Here’s how the process works:
- Issue a letter to the business proposing the resolution, giving Special Notice to board members.
- File that notice at the registered office 28 days or more before your next AGM or general meeting. All shareholders are entitled to attend and should be given the reasons behind the resolution to remove.
- At that meeting, you need a simple majority to pass the resolution – that needs to be 50.01% of attendees, including proxy votes.
- General meetings require a 14-day advance notice period, and the director has the right to contribute to the discussion before voting begins.
The best way for new start-ups to be sure they can navigate these challenges smoothly is to have a set procedure in place before a crisis occurs.
That means a clear service contract, including clauses setting out what happens to directors’ shares if their appointment is terminated.
Having those contracts makes it substantially easier to assure parity across all terminations. It ensures the business isn’t left in a tricky position if no written policies outline the options available.
If your business is starting out and you need help, consider Harper James Solicitors as your source for legal advice for a start-up company.
