Through a variety of circumstances, including neglecting their duties, a company can come to the conclusion it needs to remove a director or ask a director to leave. These situations can be tense, but the guidance on what to do to comply with the law is clear.
This article will tell you what you need to know about how to remove a director from a private company in a number of different situations.
- How to remove a director under the articles of association of the company
- How to remove a director by voluntary resignation
- How to remove a director by ordinary resolution of members
- How to remove a director by court authority or by 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 am a sole or co-director director of my company?
- Notifying and changing director details with Companies House
How to remove a director under the articles of association of the company
For any company, a good starting point is to look at the company’s articles of association (‘articles’) for guidance on how a director of that company should be removed. The articles are usually the main document that sets out how the company will be run and structured, and often contains provisions on how its directors should resign or be removed from office. What those provisions will be will depend on the type of articles adopted by the company.
A company can have bespoke articles or, alternatively, can adopt standard, general articles (‘model articles’) provided by the Companies Act 2006 (‘CA 2006’). Article 18 of the model articles for private companies limited by shares gives a good indication on the standard processes for removing a director of a private company.
Under article 18, a person will stop being a director immediately on the occurrence of the following:
- voluntary resignation;
- by an ordinary resolution of the company’s members;
- if the person is stopped from acting as a director by a court or by law;
- if a bankruptcy or debt relief order is made against that person or an agreement is made with that person’s creditors; or
- if a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months.
Below, we cover some of these situations in more detail.
How to remove a director by voluntary resignation
Provided that the company’s articles do not say otherwise, a director can voluntarily resign by notifying the company and their co-directors that they are resigning.
It’s important that a director follows the requirements in a company’s articles, which set out how a person should send a notice, for example in writing, to ensure that the resignation is valid and effective.
How to remove a director by ordinary resolution of members
A director can be removed before their term of office is over (even if that is not what was originally agreed between the director and the company) by an ordinary resolution of members. An ordinary resolution is a resolution of the members (or of a class of members) of a company, passed by a majority of the eligible voters present at the meeting.
If a meeting to remove a director by an ordinary resolution is proposed, the Board of the company should give the company’s members what is called ‘special notice’ of the proposed resolution to remove a director at the meeting. This notice is ‘special’ because there are different requirements set out in the CA 2006 on the notice than for usual shareholder meetings, including the need for a longer notice period for circulation of the notice.
If the removal of the director is time sensitive, you should factor in any additional timeframes for circulation of the notice into its planning, as the resolution to remove the director must 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.
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 notice 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 appointment and can request that these representations are sent to the company’s members. If this is not possible or does not happen, the director can then request that the representations are read out at the meeting. Unless the court determines that the director is abusing their right to be heard by the company, it is advisable to comply with the director’s requests to ensure that there is no question as to the validity of the resolution passed.
According to the CA 2006, a director that is being removed should still be given any compensation or damages payable to them, 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 are also a treasurer because they are the director, they also can’t be deprived of any compensation or damages that might be payable to them because they hold that position.
How to remove a director by court authority or by law
A director may be stopped from being a director as a result of a 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:
- A situation where a shareholder has applied to the court for an order on the grounds that the company’s affairs are being (or have been) conducted in a manner that is unfairly prejudicial to the interests of some or all members, or that an actual (or proposed) act or omission of the company is (or would be) unfairly prejudicial.
- A person cannot be a director if they are 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 the example above, article 18 says that in these events, a person will stop being a director immediately.
Importantly, 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 has ceased to hold office.
Other ways in which a director’s appointment can end
As well as by choice or by vote, a director can be removed through a variety of other circumstances. In the unfortunate circumstance of the death of the director, 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 the deceased director.
Directors may also retire from office by rotation, a practice which is particularly common in public or listed companies. The most common way of doing this, according to the model articles for public companies, is for the director to retire from office at a relevant annual general meeting of the members of the company. This person can later be reappointed, if this is an option offered by the company’s articles.
Alternatively, (particularly in larger companies or companies within a large group structure) 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 contract. 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 articles, a director can continue to hold their office even after their employment has been terminated. However, as you might expect, this is often not something that the business wants to happen. To prevent against an employee becoming or remaining a director, a company can include a provision in a director’s service contract that the event of the end of the director’s employment with the company automatically triggers a requirement for the director to be removed or to resign from office.
In the case of removing a director who is an employee, it’s strongly advised that you source legal advice about the employment law, pensions law and tax law 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 the director is seen to have gone against these duties, such as fraud, persistent breaches of the companies legislation, or on conviction of an indictable offence, a court can make a disqualification order against a person to stop them becoming or remaining a director for a period of up to 15 years. You can read a full list of matters to be taken into account when determining the unfitness of a director here.
If a director is seen to have gone against their duties, there are a few ways in which a director may be protected. The articles of a company will usually contain some protections for the directors that are validly acting on its behalf. It is 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 am a sole or co-director director of my company?
Both a sole director and a co-director can resign from office. However, a private company must always have at least one director and a public company must always have at least two directors. The CA 2006 also states that a company must have at least one director who is a natural person.
It therefore follows that the removal or resignation of a sole director will require further action by the company, as a new director will need to be appointed prior to 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, and the model articles for private companies limited by shares 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). Article 17 (2) of the model articles addresses 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. Under Section 170 (2) of the CA 2006, 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 director details with Companies House
Once a director has been removed, the business must notify Companies House of the change. There are a number of things that are important to note in this process:
- 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.
It will also be important to check for any additional obligations for listed companies as there are likely to be further notification and/or publication requirements that these companies will need to comply with.