This month’s Practical Tips look at the resignation and removal of directors.
Resignation
Most companies’ Articles of Association permit a director to resign unilaterally by tendering his resignation in writing. Alternatively a director can resign by agreement with the company.
Retirement by Rotation
The Articles of a company may provide for some or all of the directors to retire automatically by rotation at the company’s AGM. This occurs most frequently in the case of plcs, although the Articles of some private companies may also provide for retirement of directors by rotation. This is not always appropriate, especially in small private companies, as it is often overlooked and the failure to deal with it at an AGM, e.g. by re-electing the retiring directors, can lead to issues as to whether certain directors are entitled to hold office or not.
Removal
A director of a company may be removed from office in the following ways:
Automatic Removal
A company’s Articles will usually specify circumstances where a director will automatically be removed from office, e.g. where the director (i) is adjudged a bankrupt; (ii) becomes incapacitated or of unsound mind; or (iii) is convicted of an indictable offence.
A person may be disqualified from acting as a director under section 160 of the Companies Act 1990. A disqualified director can have no involvement in the promotion, formation or management of any company for the duration of his disqualification. This will often trigger automatic removal under a company’s Articles.
Removal by Shareholders or Other Directors Under the Articles
A company’s Articles may give the shareholders and/or the directors the power to remove a director. Removal by the directors is done by resolution of the board of directors. The directors must exercise this power bona fide in the best interests of the company and not for ulterior motives.
Removal by the shareholders may be done by an ordinary or a special resolution, depending on how the Articles are framed.
Removal by Shareholders Under the Companies Acts
Shareholders have a general power to remove a director under section 182 of the Companies Act 1963, by passing an ordinary resolution to that effect at a general meeting.
The general meeting must be held on extended notice of 28 days. The director is entitled to receive a copy of the notice of the resolution and has the right to be heard at the general meeting. Prior to the general meeting, the director can make representations in writing to the company and can request that they be circulated to the members.
A vacancy created by the removal of a director may be filled at the general meeting at which the director is removed, or it can subsequently be filled as a casual vacancy by the directors.
Contractual and Employment Rights
Irrespective of the method of removal or resignation, consideration needs to be given to any contractual or employment rights which the outgoing director may have. For instance, section 182 of the Companies Act 1963 expressly preserves any right to damages or compensation which the director may have concerning his termination. An executive director may also have a claim for unfair or wrongful dismissal. Detailed advice should be taken in this regard.
Contributed by Ian Murray.
Back to Legal News
