A company has two equal shareholders A and B. Shareholder A is validly appointed as a Director but Shareholder B has been appointed without any authorisation from A as the sole previous existing Director. The Model Articles are relevant. The case has just been taken over from another firm and we are anxious that the matter be resolved. A and B don't see eye to eye and probably shouldn't be in business together but we are stuck with this situation for the time being. Whilst we don't have the facts and the previous agent has not volunteered any information they may have dealt with the appointment on B's instruction as he is a client of theirs. I'm not interested in pursuing the previous agent over this - they may have acted in good faith, just interested in the mechanics of the removal of someone appointed as a Director where the appointment clearly has no paperwork to back it up.
Any observations or comments, particularly where there has been experience of this will be much appreciated. My own feeling is a board minute of a director's meeting held by A alone explaining the position and authorising us as the new agent to remove B from the record at Companies House will suffice but these situations can possibly be a potential minefield to negotiate.
Thanks in advance!
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Be very careful
No direct experience, but just a few thoughts.
How do you know that B was made a director without authorisation? You are only taking over the job now, so presumably weren't involved in the original appointment. As they don't see eye to eye now, is it possible A is trying to rewrite history by changing a decision they now regret.
For that matter, how long ago was this appointment? Even if there was some irregularity with the original paperwork, B would have shown as a director on annual returns and company accounts subsequently. If A has signed off on either of these, then that could be seen as validating the appointment regardless.
You are proposing removing a director who is a 50% shareholder of the company. Do you think conspiring with one 50% shareholder to ease the other out (which is what this looks like) is a wise move? I can't help thinking you risk opening yourself up to being sued by B if you go ahead with this.
This is a legal matter, and you would be best advised to direct them to a legal expert to deal with it.
when the company was formed who was first director
it maybe that there is no minute because he was an initial participant and it was agreed at that time but not processsed till later. A 50% shareholder is likely to have agreed to be a director.
Companies House will not get involved
there is no easy way around such impasses and legal action is to be avoided
I agree that this is a legal matter, and one that an accountant should stand well back from.
But what is the problem? If B hasn't been appointed as a director he doesn't need removing does he? Because he isn't one? Is the problem that he is acting as if he were a director? Or is there a dispute as to whether he is or not?
And you say that he needs removing from the Companies House record as there is no paperwork to back up his appointment. But there must be mustn't there? Or else he would not be on the Companies House record in the first place!
To the OP
Appointment of directors:
If you have the model articles it says a person willing to act as a director can be appointed by an ordinary resolution of the shareholders or by the Board.
Removal of the directors
Majority shareholders can remove (s.168) a director by an ordinary resolution which cannot be a written resolution (s288). There should be a special notice, should give the director an opportunity to be heard before passing the resolution to remove him at a general meeting.
So if A is a majority shareholder then director B can be removed.
No resolution?
You may well have a de facto director.
Useful for Entrepreneurs' relief see this case http://www.rossmartin.co.uk/sme-tax-news/1459-disguised-employment-and-e... this case also takes you through the different sorts of "directors" recognised by the law.
I appreciate that ER is not the issue, however I would take steps to validly appoint him. If the other director refuses then there could be scope for an action against the company to rectify the situation, it is not in anyone's interest to have this situation continue, and if you have evidence that his fellow shareholder, the last accountants and whoever else treated him as a director then it would be slightly perverse to say that it was not in the company's interests to appoint him properly.
Having re-read the OP that it's a 50:50 ownership+directorship I must say this is a disastrous set up if there exists no shareholders agreement. If one says yes and the other no you are stuck as the company is your client, unless you're acting for A only. The OP says the client has just been taken over; now that is possible only after both the directors (the Board has) have agreed, otherwise the appointment could be null and void!
Legal issue
There is indeed no paperwork appointing B as a director ( the previous agents sent me the company secretarial file) and I would presume the appointment was made purely on verbal instructions by B, in the absence of any other information, so it now appears on the Companies House register for the company. The legal route does seems appropriate in view of the concerns expressed as A is extremely upset that an appointment could be made without his knowledge, which is a reasonable belief. I'm still left wondering though, as a technical issue, how an invalid appointment is rectified assuming that A does not feel able to ratify it.
1. Are you saying that the previous accountants acted on the verbal instructions of B without consulting and taking instructions from A who was then the sole director at that time? If it's yes, then the appointment of B is null and void and B's decisions are invalid. But an outsider who is a party to a contract involving the company and B could successfully argue they acted in good faith. However, do bear in mind that this is a legal issue and likely to be challenged by B. B could argue that the verbal instructions were issued on the basis of a verbal agreement with A, effectively constituting a board meeting! If B has the finances to fight what will follow is a long-drawn battle followed by huge solicitors' bills with the result that the business will suffer.
2. Companies House is where the public register is maintained which gets updated with changes in statutory registers etc etc. An entry on the public register does not by itself provide any conclusive evidence that a director has been validly appointed.
3. For the accountants (yourself included) the company is the client and the company decisions are made by the Board collectively unless a particular director is specifically made responsible through a board resolution. As I mentioned before, you need to make sure that your own appointment as accountants is valid under the circumstances!!
I am sure the first question the lawyers will ask will be who completed the AP01 on the Companies House website and by whom does that person say they were instructed to do so. It would be as well to be equipped with the answers.
Sounds like an expensive waste of money
Engaging lawyers to argue endlessly over this issue seems like an awful waste of money for an ultimately deadlocked company.
Long story short - does B act like a director of the company? If so, the legal niceties of the appointment would seem to be irrelevant, particularly if both parties have tacitly acknowledged this in the past by signing accounts, annual returns etc as Stepurhan suggests.
Confused as usual
If they are 50/50 shareholders surely B has a much right to appoint himself as a director as A had to vote himself.
Legal action is a waste of time although I agree it is a legal matter.
If I were you I would just get rid because you are going to get involved in a dispute that can only be settled by common sense. Sadly common sense would appear to be absent in this case.
Why do you have to do anything?
As you say, it is up to A what he does (preferably having taken legal advice and/or discussed it with their co-director....). A can terminate B's appointment and inform Companies House himself too; why do they want you to do it?
Stand well back, and make sure you get paid....
Termination
A can terminate B's appointment and inform Companies House himself too; why do they want you to do it?
No. A can't remove B without B's agreement because he does not have voting control. That's the point. A's options are to put up with B being a director or to take steps to have B's appointment held to have been invalid ab initio. A certainly can't do that himself.
My point...
...was the slightly simpler one, namely that the OP should ask A to do his own dirty work (send forms to Co House) rather than asking his accountant to do it
Yes but he can't send forms to Companies House until the dispute is resolved and the question of what should go on those forms is established.
He can...
... in that CH will accept a termination notice signed by another director, but he shouldn't. I completely agree with you.
Yes of course he CAN - but that would be an invalid termination notice as there would have been no termination. So it's not just a matter of what he shouldn't do, it's that it would be pointless as it would not resolve the dispute one iota - but rather inflame it.