The office of UK Company director may be vacated by statute, by death, or under a provision in either the Company’s Articles of Association or, if one exists, a Shareholders Agreement.
Looking at each “Vacation” method in turn:
This can arise by:
• the director retires having reached the relevant age limit;
• the director fails to take up a share qualification required by the Articles within two months of the appointment;
• the director becomes bankrupt;
• the director is disqualified from being a director, usually by court order.
A conflict with a director can be a difficult and fractious time for a company.In smaller companies with fewer personalities and resources usually one of two extreme possibilities occurs – the parties resolve the issue amicably or the parties are irreconcilable and the company collapses.
The easiest way to resolve a situation is usually to seek to persuade the director to resign in consideration for a severance package or some other benefit, or for the sake of the company and its stakeholders.
Additional Methodsof Removal
These can be included in the Articles (Article 18 of the Model Articles and Article 81 of Table A) and include:
• a person ceasing to be a director under the Companies Act 2006 or being prohibited by law;
• absence from board meetings for a specified period (typically six months);
• bankruptcy of director (including a compromise or arrangement made with his or her creditors generally;
• mental disorder or incapacity;
• death or physical incapacity;
Other grounds could be added to the articles and/or provisions inserted to make it easier to remove a director.
A court may make a disqualification order prohibiting the person from acting as a director of a company, or being involved in the management of any company, for the period of the disqualification. Such orders are made under the Company Directors Disqualification Act 1986 and afford courts the power to make a compensation order against a person who is subject to a disqualification order where he or she has caused loss to one or more creditors of an insolvent company of which the person has been a director.
A Director who is a shareholder who is removed from office, would not have his shareholding affected.
In many circumstances the only solution is for there to be negotiations for the purchase of the ex-director’s shares.
In some circumstances, the removal of the director may be grounds for petition under CA 2006, sec994 (the unfairly prejudicial conduct provision) under which the court may order the remaining shareholders (or indeed, The Company itself) to buy the ex-director’s shares.
Some companies’ Shareholders Agreement or Articles provide a clause setting out when compulsory or “Deemed” transfers of shares apply. We always recommend this in certain circumstances.
How to Remove a Director under Company Act 2006
However, if the foregoing is not practicable then procedure for removal of a director is as follows:
• “Special Notice” (under Companies Act 2006 Section 168) is given by the member(s) wishing to remove a director at least 28 days before the meeting at which an Ordinary Resolution is to be moved (under Companies Act 2006 Section 312);
• on receipt of the notice the Company must send a copy of the resolution to the director concerned. A board meeting must also be called to convene a general meeting;
• the director concerned is entitled to make written representations to the company and to request their notification to the members. The director may also speak at the meeting on the resolution concerning his/her removal;
• the board may, if it so wishes, make representations to the members whether they are for, or against the resolution, or even if they are divided. However, the proposers of the resolution may only make representations at the general meeting. Removal of a director under these circumstances does not affect his or her rights to compensation under the terms of the appointment. Executive directors are employees of the company whether there is a written contract or not and their dismissal is governed by normal employment law.
For the purpose of unfair dismissal, the statutory procedures for removal of a director from office do not comply with the minimum requirements of the ACAS Code of Practice on Discipline and Grievances at Work. As a result, if a director is removed from office and this also terminates his/her employment, the dismissal will almost certainly be unfair. A director who is removed from office may therefore have a substantial compensation claim against the company. If the director is also a shareholder then, depending on the circumstances, he/she may also have a remedy for “unfairly prejudicial conduct” of the company’s affairs, under Section 994 of the Companies Act 2006.
It is recommended that professional legal advice should be sought in all cases.
For Company Law Advice and Assistance contact Jonathan Abrams, Partner Solicitor in the Corporate department at Gregory Abrams Davidson LLP today on:
0151 236 5000 in Liverpool
0208 209 0166 in London.