The crucial role of a manager or director of a company is to manage it to maximize the benefits to the shareholders while making sure that the company complies with all applicable regulations and laws. In many companies, regardless of size, directors are often both the managers and owners.
So, it is a grave concern for a company when the director is constantly against the board’s strategies or keeps underperforming consistently. When there is no alternative left for the company other than removing such a director, they can go for the following ways.
As mentioned earlier, an area that has to be handled and considered very carefully is the employment status of the director within the company.
The procedure under the Companies Act 2006 applies regardless of any agreement between the director and the company. So, if the director is an employee of the company, they have a service agreement with the company that will not prevent them from getting removed as a director.
But based on the specific circumstances, a court might find that removing a director from office amounts to constructive dismissal. Thus, it opens the door to the former director bringing a claim for unfair and wrongful dismissal against the company. This is something to consider about how to remove a director from a company.
The procedure to remove a director by ordinary resolution is present in sections 168 and 169 of the Companies Act 2006. A shareholder needs to hand over a special notice of his intention to his company if he wishes to propose a resolution for removing a director.
The board of directors will call a general meeting of the company’s shareholders within twenty-eight days of receiving this special notice. The board will consider the proposed resolution during this meeting. Then, all shareholders and the director in question will receive the notice of the general meeting. The said director might make written representation in response to this proposal to remove him. If possible, the company should circulate the representations to the shareholders before the meeting.
At the meeting, the director facing the charges can speak in his defense. The resolution to have the director removed needs to pass by a simple majority (over 50%).
The statutory procedure can help remove a director even when the company’s articles of association have a provision that purports to the relevant parts of the Companies Act 2006 from applying to a company. This is because such conditions are deemed unlawful letters on the statutory powers of the company, and it is unenforceable against the company.
However, one can defeat the statutory procedure by a provision in the articles of association. It will be about granting a specific shareholder or a group of shareholders greater voting rights on a resolution to remove certain directors.
For instance, when a shareholder gets the right to appoint a director, the articles of association might give that shareholder ten votes for every share he holds on a resolution to remove him from office. It is standard protection in joint venture companies and for investors.
Section 994 of the Companies Act 2006 lets a shareholder petition the court because the company affairs have been or are being conducted in a way that is unfairly prejudicial to the shareholders or some parts of them.
It is commonly termed as an unfair prejudice claim. The question of what unfair prejudice can be has been the subject of a lot of deliberation by the courts through the years. Also, the concept has found its application in a variety of settings. These include the situation where a director gets removed from the office in a company that the court deems a quasi-partnership.
As the name suggests, a quasi-partnership is a company that is meant to operate as a partnership between the shareholders. It is a company that is responsible for every shareholder to stay involved in the company’s management. Most of the owner-managed businesses are quasi partnerships.
A few shareholder agreements and articles of association state the directors need to retire by rotation at the end of a particular time. The provision isn’t as common in articles as it was formerly, and you will not find this in the articles of smaller companies. When the provision is present, the articles usually state how retirement can get affected. However, it will usually get enforced at the annual general meeting of the company shareholders when new directors get appointed.
If this were the situation, the retirement would get minuted, and the company would terminate the appointment of the director at the Companies House and within the registers. But, of course, the director can also resign and serve his letter of resignation to the company as the rest of the officers can update the record of directors.
The statutory procedures are essential tools for the companies dealing with a dissident or unfit director. However, the company has to seek sound legal advice before proceeding further in this direction. Therefore, it is crucial to ensure that potential pitfalls get avoided as the process is duly followed.