Removal of a director

Specific advice should be obtained on any particular issues.

Unless there is a special provision in the company’s Articles of Association a director cannot be removed from office by the Board, and only the shareholders can remove a director.

The Articles may provide a procedure for this; otherwise the statutory procedure must be used. The statutory procedure allows any director to be removed by ordinary resolution of the shareholders in general meetings (i.e. a simple majority of votes), and cannot be excluded by the Articles or by any agreement. However an executive (employed) director who is removed from office may have a claim for compensation under the law of unfair (statutory) and wrongful (contractual) dismissal, which could be substantial.

The statutory procedure for removing a director from office is cumbersome, protracted, and full of technical traps. If a director cannot be persuaded to resign as a director and an employee as part of a severance package, the Articles might provide alternative means for the director to vacate office which is less problematic than the statutory procedure for removal. For example, if a director is due to retire by rotation it is simpler to vote against his/her reappointment than to use the statutory procedure for removal from office.

The model Articles under the Companies Act 2006 provide for a director to vacate office if he/she:

• ceases to be a director by virtue of any provision of the Companies Act 2006;
• is prohibited by law from being a director (which includes disqualification);
• is made bankrupt or makes any arrangement or composition with his/her creditors (which would include an Individual Voluntary Arrangement – ‘IVA’ – under the Insolvency Act);
• has become physically or mentally incapable of acting as a director, and may remain so for more than 3 months, as certified by a medical practitioner;
• is subject to a court order preventing him/her from exercising any powers or rights because of his/her mental health;
• resigns.

The Statutory Procedure for Removing a Director

The statutory provision allowing any director to be removed from office by ordinary resolution of the shareholders is in Section 168 of the Companies Act 2006 (CA06). Importantly, the reesolution must be proposed at a formal shareholders’ meeting and cannot be passed as a written resolution. The following is a summary of the procedure.

1. Special notice of the resolution is required (s.168 CA06). This means that the shareholder(s) intending to propose the resolution must give written notice to the company at least 28 days before the meeting at which the resolution will be proposed (s.312 CA06). If this is not done, or not done correctly, the resolution will be ineffective even if it is validly passed at a properly convened meeting.
2. On receipt of such notice, the company must immediately send a copy to the director concerned (s.169 CA06).
3. The director concerned is entitled to make written representations to the company (not exceeding reasonable length) and to require their circulation to the shareholders, subject to certain safeguards. If the representations are received too late for circulation, or the company fails to circulate them, the director may require that they be read out at the meeting. He/she is also entitled to attend the meeting and speak on the resolution, even if he/she is not a shareholder (s.169 CA06).
4. The company must give all shareholders notice of any such resolution at the same time and manner as it gives notice of the meeting or, if that is not practicable, by newspaper advertisement or other means allowed by the Articles, at least 14 days before the meeting (s.312 CA06).
5. The meeting should be convened and conducted formally, in compliance with all statutory requirements relating to meetings of shareholders and the applicable provisions of the company’s Articles (including quorum and voting), otherwise the resolution may not be valid.

Guidance for the Board

On receipt of notice of an intended resolution to remove a director, a Board meeting should be held immediately to convene the shareholders’ meeting and deal with other procedural matters as outlined above. The director concerned must receive notice of the Board meeting, and will be entitled to attend and speak. This may cause embarrassment or antagonism, but cannot be avoided.

In practice, the shareholders’ meeting cannot be held on short notice because of the timing requirements under s.312 CA06 (see 1 and 4 above). The Board cannot invalidate the special notice, and thus prevent the resolution being validly passed, by convening the shareholders’ meeting to be held less than 28 days after receiving the notice: s.312(4) provides that the notice will be deemed to be valid in these circumstances.

The Board may wish to make its own recommendations to shareholders, whether the Board supports or opposes the resolution, or even if the directors are divided. There is nothing to prevent such recommendations being made.

There is no statutory right for the proposer(s) of the resolution to have representations in support of the resolution circulated to the shareholders. However the Board may agree to circulate such representations or the proposer(s) may choose to pay for a copy of the shareholders’ register and send out their own circular.

Consequences

Removal of a director from office does not deprive the director of any right to compensation or damages in respect of the termination of his or her appointment as an employee (s.168 CA06). As mentioned above, the director may have a substantial compensation claim against the company; regardless of whether their removal from office was supported or opposed by the Board.

Whether an executive director’s employment is terminated by their removal from the office of director will depend on the terms of their service agreement or contract of employment. In some cases the Board may need to take separate steps to terminate the employment of an executive who has been removed from office as a director. These are not covered in this note, and all the applicable provisions of employment law should be considered.

For the purpose of unfair dismissal, the statutory procedures for removal of a director 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 their employment, the dismissal will almost certainly be unfair, and the director may be awarded enhanced compensation if they have sufficient qualifying employment (2 years).

The director may also have a contractual claim for wrongful and constructive dismissal based on the company’s breach of contract including the implied term of trust and confidence. This would result in further compensation being due to the director normally equivalent to the salary and, depending on the wording of the contract, loss of benefits that the director would have been entitled to receive during the notice period.

If a director who is removed from office is also a shareholder then, depending on the circumstances, they may also have a remedy under s.994 CA06 for “unfairly prejudicial conduct” of the company’s affairs.

© Institute of Directors. All rights reserved.