If the decision has been made to dismiss a director, the company must ensure the termination is conducted lawfully. Dismissing a company directory can potentially raise a number of issues, and the exit can quickly become contentious if not handled correctly.
Company directors have certain rights and responsibilities, over and above those of employees and workers. Many directors are also employees or shareholders, so before terminating a contract, the specific legal implications and requirements should be investigated to avoid the potential for a dispute and exacerbating what in some circumstances may already be a contentious exit. This means following the provisions of the Companies Act 2006, as well as the terms of specific company documentation.
In this guide, we outline the key considerations for companies looking to dismiss a company director.
Determine their legal status
The first step before dismissing a director should be to clarify the director’s actual status within the company. Executive directors and non-board employee directors are also classed as employees and as such are able to bring claims for unfair dismissal if they are unlawfully dismissed from their role. This is in contrast to non-executive directors, who are not employees and so cannot claim unfair dismissal.
You also have to ensure you are acting in accordance with requirements under the Companies Act 2006 and the conditions of any relevant business documentation, such as the director’s contract with the organisation.
Check the director’s service agreement, employment contract, or letter of appointment to determine if the director’s contract specifies termination conditions. If the contract does not include terms relating to dismissal, take legal advice to understand your options.
Review 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.
“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.
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 can be 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 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.
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 such terms to be inadequate in the circumstances.
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 who is also a shareholder
If the director also holds shareholder status, you will need to consult the company’s shareholders’ agreement and articles of association. These documents should specify what happens to the shares if the director is dismissed. In most situations, the contracts include share transfer provisions that indicate that when a director is dismissed, a share sale notification would be issued. There may be additional provisions relating to the valuation of shares.
Companies don’t always have shareholders’ agreements in place, which make it more difficult to remove a shareholder from office. This is especially true where shares are split 50:50, because the decision to dismiss requires more than half of the votes.
A number of provisions in the model articles demand the instant dismissal of a director, including:
- Any aspect of the Companies Act 2006 or other UK legislation that makes it impossible for a director to continue in office.
- Having a director declared insolvent.
- The director’s physical incapacity, as determined by a medical professional.
If the articles of association provide no right to remove a director from office, shareholders may be able to remove the director by voting an ordinary resolution. The procedure outlined in section 168 of the Companies Act 2006 must be followed in order for the removal to be lawful. This requires shareholders to give the director at least 28 days’ notice before the general meeting to vote on the ordinary resolution.
The director who is the subject of the general meeting has the right to be heard and to make representations to the company regarding the proposed resolution to remove them from their position.
If the vote is to dismiss the director, formal notification of the removal should be given to the director in writing.
Failure to follow the procedure could be interpreted as a breach of the broader obligation to operate reasonably and fairly.
A shareholder meeting does not need to be called unless the company has received requests from shareholders with voting rights. The required percentage of the company’s paid-up capital must also be held by the shareholders.
If the board of directors fails to call a general meeting, the petitioning shareholders may hold one at the expense of the corporation. The meeting must be held within three months of the date on which the directors were required to convene it.
After a director is dismissed from a limited company, they must file form TM01 with Companies House to show that they are no longer an officer of the company.
Depending on the circumstances, it may be preferable to ask the director to voluntarily resign from the company within the terms of their contract to avoid dismissal procedures.
Companies House should be notified electronically or by post using Form TM01 within 14 days of their resignation date if they accept.
The public register, which includes all publicly available information on the director, will be updated to reflect the new information.
Removal by court order or other authority
A business director can be disqualified by the court, Companies House, HMRC, the Competition and Markets Authority (CMA), or an insolvency practitioner if they fail to fulfil their statutory duties and responsibilities, or if their behaviour is deemed ‘unfit’ for any other reason.
Any member of the company or a member of the public can file an official complaint with the insolvency Service against the conduct of a director.
The term “unfit conduct of a director” refers to situations in which:
- When the company was insolvent, the director continued to trade to the prejudice of its creditors.
- Failure to prepare and submit yearly financial statements and/or confirmation statements
- Not sending tax returns to HMRC and/or failing to pay tax liabilities
- They have not followed an insolvency practitioner’s or the Official Receiver’s instructions or cooperated with them.
- Taking away a director’s licence
- A director can be removed from a company and disqualified as a director if they fail to meet the legal standards set out in the Companies Act 2006 and the articles of association.
A person who has been disqualified from holding a position in another company is prohibited by law for the duration of the ban. Directors can be disqualified for up to 15 years if they hold office in an overseas firm with UK ties or are involved in founding, marketing, or running another company. They are likewise barred from joining a Limited Liability Partnership as a partner (member) (LLP).
If a disqualified director violates the provisions of his or her disqualification order, he or she could face a large fine or a two-year prison sentence.
The following are some examples of grounds for disqualification:
- The 16-year-old age requirement has not been reached.
- There are insolvency proceedings pending or the director has been declared bankrupt.
- A Debt Relief Order has been served on the director for using company funds or assets for personal advantage.
- Loans to directors are being repaid.
You may mistakenly find yourself owing a large sum of money to the ousted director if you initiate the removal of the director. You’ll have to think about if this is an expense the organisation can bear.
If the director you intend to remove has made any loans to the firm, a loan given to the company by a director is payable in full on demand unless otherwise agreed.
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.
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.