Dismissing a Director of a Limited Company

Dismissing a director of a limited company can raise complex and sensitive legal issues. Many directors are also employees or shareholders, so before terminating a contract and dismissing them from office you will need to understand the legal implications of dismissal to avoid the potential for a dispute and exacerbating a contentious exit.

Check the documentation

There are certain documents that need to be inspected to ensure you act within the law and within the terms of any contract of employment.

Service agreement, employment contract or letter of appointment

Check the director’s service agreement, employment contract or letter of appointment to see whether termination clauses have been included or agreed with regard to the director’s employment contract. In cases of contractual silence, it is important to take legal advice as to what steps you should take next, this is particularly important so you do not end up with a claim for unfair dismissal.

Articles of Association and shareholders’ agreement

Articles of association and signed shareholders’ agreements are likely to incorporate provisions setting out when directors can be removed or forced out. In cases where the articles are not explicit or silent, you must check whether the “Model Articles” or “Table A” were adopted or incorporated under The Companies Act 1985 when the company was formed. Both model articles and Table A contain provisions and convey automatic rights to terminate a director’s appointment under certain circumstances.

The model articles contain a number of provisions that require immediate removal of a director, that include:

• Any provision of the Companies Act 2006 or other UK legislation prohibiting a director remaining in office
• A director being declared bankrupt
• Physical incapacity of the director as diagnosed by a medical practitioner

Failure to follow an established internal process may be considered indicative of a wider duty to act reasonably and fairly.

Dismissal procedure under section 168 of The Companies Act 2006

If you have found from the company’s articles of association there is no right to remove a director from office, then it is still possible to dismiss them providing the shareholder’s pass an “ordinary resolution”. However, in order for the removal to be valid, the strict procedure under section 168 of the Companies Act 2006 must be followed.

Procedure

“Special Notice” must be given to the director in question at least 28 days before the general meeting is held on which the shareholders intend to vote on the ordinary resolution.

If the board decide to dismiss the director it is essential to follow the correct protocol; it is advisable to download a sample letter for removal of a director to ensure you get it right.
Directors do not have to call a shareholder’s meeting unless the company has received requests from those shareholders who hold voting rights. The shareholders must also hold the required percentage of the paid-up capital of the company.

The director subject of the general meeting is entitled to be heard and make representations to the company in respect of the proposed resolution to remove them from office.

If the directors fail to call a general meeting, then the requesting shareholders may hold their own at the company’s expense. The meeting must take place within three months of the date when the directors were required to hold it.

Once a director has been removed from a limited company, then form TM01 must be filed at Companies House to show that they are no longer an officer of the company.

Voluntary removal

A director can resign from the company within the terms of their contract, or alternatively, you can ask the director to voluntarily resign in a bid to avoid dismissal proceedings. If they agree, Companies House should be notified online or by post using Form TM01 within 14 days from the date of their resignation.

The public register, that is, all information relating to the director displayed on public record, will be updated accordingly to reflect the changed information.

What if the director is also a shareholder?

It is easy to confuse the role of a shareholder and director.

A shareholder holds equity in the company and unless stated or agreed to the contrary will not have any responsibility for management of the company. They do hold shareholder rights, including the right not to be unfairly prejudiced. So there is a risk of threatened or commenced action by a partner director in any attempt to affect their role within the company. Conversely, they could equally claim to be prejudiced because of the other party’s continuing behaviour towards the company and its operations.

In cases where you are sacking a director with shares, you should check the terms of the articles of association and, if there is one, the shareholder’s agreement. These documents should set out what will happen to the shares when the director is removed. In most cases, the documents contain provisions of share transfer that state a share sale notice will be given when a director is dismissed. There may also be additional provisions surrounding share valuation.

If you hold more than 50% of the shares of the company, then you can simply remove the director from office. However, if the shares are owned on a 50 : 50 basis this is not something you can do.

What happens if there is no shareholder agreement?

Sometimes, companies do not have a shareholders’ agreements in place. In cases such as these it can prove to be tricky to remove a shareholder from office. This is particularly true where shares are held 50 : 50 as decisions require over 50% of the votes.

If there is a shareholder’s stalemate, the company cannot function and if the company cannot function then it may have to be dissolved.

In the absence of mechanisms for the recovery of shares or resolution of the stalemate, determination of the situation will hinge on whether it is capable of negotiation. If negotiation fails, then court action may be next with company dissolution not far behind.

Removal by court order or other authority

In any case where a company director fails in their statutory duty and responsibility, or where their conduct is believed ‘unfit’ for any other reason, a company director can be disqualified by the court, Companies House, HMRC, the Competition and Markets Authority (CMA) or an insolvency practitioner.

An official complaint can be made to the insolvency Service about a director’s conduct by any member of the company or a member of the public.

What constitutes unfit conduct?

Unfit conduct of a director applies where:

• The director has continued to trade to the detriment of its creditors when the company is insolvent
• They have failed to keep proper accounting records
• Failure to prepare and lodge annual accounts and/or confirmation statements
• Not delivering tax returns and/or pay tax liabilities to HMRC
• They have not complied with a direction of or co-operated with an insolvency practitioner or the Official Receiver

Disqualifying a director

Where a director fails to meet the legal requirements contained within the Companies Act 2006 and the articles of association, they can be removed from a company and be disqualified as a director.

A person who has been disqualified is prevented by law for holding a position in any other company as long as the ban prevails. Disqualifications can be for up to 15 years, and directors cannot hold office in an overseas company with any UK connections or be involved in forming, marketing or running any other company. They are also prohibited from being a partner (member) of a Limited Liability Partnership (LLP).

If a disqualified director violates the terms of a disqualification order, it can lead to a hefty fine or a prison sentence up to two years.

Example grounds for disqualification:

• The minimum age requirement of 16 is not met
• There are bankruptcy proceedings or the director has been made bankrupt
• The director has been served with a Debt Relief Order
• Using company finances or assets for personal gain

Settling directors’ loans

By initiating removal of the director, you may inadvertently find yourself having to pay substantial monies to the dismissed director. You will need to consider whether this a cost the company can afford.

If the director you wish to remove has made any loans to the company, then unless otherwise agreed, a loan made to the company by a director is payable in full on demand.

Further considerations

There may be assets or documents the director has in their possession, such as confidential information, trade secrets, client lists, intellectual property, company credit cards, keys or other property you need returned.

If you are in the process of removal then you may need to give consideration to notifying the bank and asking them to remove the outgoing director from the mandate.

Most of these considerations are usually accounted for within the shareholders agreement, but if they are not, it is advisable to take legal advice as to your position before you do anything further.

Dismissing a director who is also an employee

Unless there is a case of gross misconduct, you will not be able to immediately terminate the director’s employment and should therefore comply with any notice period.

The notice period should be contained within a clause of the director’s contract of employment, however it is common for companies to fail to draw these up adequately.

If there is no contract you will have to decide whether the director was, on all the facts available, an employee and rely on statutory notice periods. Of course, some directors are self-employed but care should still be taken not to overly rely upon the ‘label’ of a role. If in doubt, a good starting point is to consider the common law “control test”:

• Mutuality of obligation – is the employer obligated to provide work, the individual has agreed to perform that work and be paid for it?
• Control – does the employer have the right to control the individual and supervise them, even where that right is not exercised on a regular basis?
• Personal service – Where an individual can send someone else to perform their duties, this will not be consistent with personal service.

You may want to think about suspending the director pending the outcome of any wrongdoing investigations but in order to protect the company against a claim for unfair dismissal, you should give proper notification setting out clear reasons for the suspension. Suspension should only really be exercised in cases where serious allegations have been made against the director.

All employees who have more than two years continuous service, whether they are also a director or not, have statutory rights, including the right not to be unfairly dismissed. In cases of discrimination, termination will automatically be classed as unfair and will expose your company to a claim in an employment tribunal.

Where directors are also employees, there are numerous procedures to comply with, and arguably more important that the correct process is followed. If in any doubt, before taking action you should seek legal advice.

Dismissing a director FAQs

Under what circumstances a director can be removed?

A director can be removed from a limited company but it must be in accordance with the terms contained in the Companies Act 2006, the company articles of association, the shareholder’s agreement (where there is one in place), and the service agreement between the director and company.

How do you terminate a director’s employment?

For any company that does not have removal powers contained within their articles of association, then it is possible for shareholders to remove the direction from the limited company by an ordinary resolution. This is provided that strict procedures under section 168 of the Companies Act 2006 are followed.

How do you remove a director who is also a shareholder?

Shareholders who command a majority (51%) of the company’s shares can remove a director by passing an ordinary resolution after giving special notice of a general meeting. Care needs to be taken where the director is also an employee because, in addition, you will need to terminate their employment contract.

Can you resign as a director if you are the only director?

If you are the sole director of the company and you own shares, you can appoint another director to take over the running of the company. Additionally, you could always sell the business and any assets, or dissolve it and sell any tangible assets that remain.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.