Removing a director from office in a family business

Relationships in business can break down, even in family businesses, and companies often need to take a different direction necessitating a change in management. Robert Goddard, company law expert at Thackray Williams solicitors, explains the different ways of removing a director and situations where a director may automatically lose his position.

Before considering what route to take, you must always ensure that your reason for removing the director is fair, or you could find yourself facing an employment tribunal claim for wrongful dismissal and a compensation pay out.

Special considerations where a director is also a shareholder

Where the director being removed is also a shareholder, removal from office will not usually affect their shareholding and voting rights. In small private companies, where a director is often a shareholder, it is advisable to hold negotiations for the purchase of the ex-director’s shares. Alternatively, it may be wise to insert a clause into the articles of association that a shareholder who ceases to be a director is deemed to have given the company a transfer notice in respect of his shares.

Removal by ordinary resolution

A director can be removed by an ordinary resolution of the shareholders under section 168 of the Companies Act 2006.

The company will need to serve a special notice of its intention at least 28 days before the meeting, or the resolution will be invalid and give notice of the resolution at the same time.

The company must forward a copy of the notice to the director concerned, who is entitled to make representations at the meeting.

The ability to remove a director by ordinary resolution cannot be excluded by the company’s articles of association. However, it can be avoided rather easily by inserting a clause into the articles conferring additional voting rights on the director who is about to be removed, with the consequence that the director can prevent the resolution from being successful.

Removal and resignation under the articles of association

The terms for removing a director in the articles of association will differ depending on the particular company concerned. However, the model articles are the default provisions for companies incorporated after 1 October 2009, which come into effect if the company does not register its own articles.

Article 18 of the model articles provides that a person ceases to be a director:

• by virtue of any provision of the Companies Act 2006 or if prohibited from being a director by law;
• if a bankruptcy order is made against that person;
• if a composition is made with that person’s creditors generally in satisfaction of that person’s debts;
• where 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 is likely to remain so for more than three months; or
• where notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms.

Directors’ disqualification

The civil and criminal courts have the power in certain circumstances to disqualify individuals from exercising management functions in relation to any company.

A civil court can make a disqualification order against an individual who has been a director of a company which has become insolvent , while they were a director or subsequently, and where the court believes that their conduct as a director of that company makes them unfit to be concerned in the management of any other company.

A criminal court can disqualify a person from being a director if they have been convicted of certain offences in connection with the management of a company.

Depending on how a director is disqualified, it may be necessary to take further action. If a sole director of a company the official receiver may liquidate the company, and sell any assets.

If a company has multiple directors, the disqualified director should inform them immediately and resign their position.

A court can order a director’s disqualification and can also give permission for a disqualified director to act in relation to a particular company.