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When directors disagree: What to do

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5th Sep 2012
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In response to recent posts on AccountingWEB where company directors were in dispute, Jennifer Adams offers advice on the procedures and principles that apply in such situations.

According to the Companies House website the DTI had four key objectives when compiling the Companies Act 2006 (CA 2006) namely:

  • To enhance shareholder engagement and a long-term investment culture
  • To ensure better regulation and a “think small first” approach
  • To make it easier to set up and run a company; and
  • To provide flexibility for the future.

Arguably these objectives have mainly been achieved, but in some sections the draftsmen were obviously unaware of the problems that small, private company directors may encounter, and allowed no specific remedies for when those problems do arise.

Take the Any Answers question Directors withholding statutory records. As the unfortunate accountant caught in this situation noted, withholding the statutory records wasn’t the most noticeable point at issue - physical records no longer being that important apart from as a record of the past - rather a specific clause in the shareholders’ agreement added to the company’s articles.

The non-standard clause stated that board meetings were inquorate without a particular shareholder present. (For details on the creation and use of such documents see Shareholders Agreements - Get the Details Right).

Removal of Directors

The original query made it clear that the other directors/shareholders wanted rid of the offending director. The removal of a director is usually achieved quite easily by ordinary resolution with special notice (CA 2006 s168): just a simple majority of shareholder votes is needed. However, a meeting is required as a written resolution is not permitted (CA 2006 s288 (2a)).

Bushell v Faith provisions

The ability to remove a director by ordinary resolution cannot be overridden by any articles (see CA 2006 s168 (1) - “notwithstanding anything” in the company’s articles or “in any agreement between” the company and the director). In practice, however, it can be avoided by the insertion of what is known as a “Bushell v Faith” clause. Such a clause is likely to be found in the shareholders agreement and confers enhanced voting rights on the director who is being removed (assuming that they are also a shareholder).

The actual ‘Bushell v Faith’ 1970 case was as follows: 100 shares were held by Mr Faith and the other 200 by his two sisters, Mrs Bushell and Dr Bayne. Article 9 of the company’s constitution stated that under a resolution to remove a director, directors’ shares would carry three votes each. Thus when the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two, 200 votes together. The resolution could therefore be blocked.

The clause usually states that the number of rights of the director being removed is to be weighted by a factor large enough such that the other shareholders cannot achieve the requisite majority for the resolution to be passed. A Bushell v Faith clause may well have been the problem behind the Any Answers question.

In practice, Bushell v Faith clauses are only relevant to private companies, since the London Stock Exchange would a refuse listing if such restrictions existed on the removing of directors.

How else to rid of a director

In my previous article, Directors’ duties: Get the details right, I wrote: “Directors hold a position of trust on behalf of the company’s shareholders. Their prime duty is to manage the company for the benefit of those shareholders and not for any individual shareholder or group of shareholders.”

As Tony Court correctly commented in the Any Answers thread on withholding documents, there has been a clear breach of directors’ duties that needs to be explained to the director involved as clearly and as soon as possible before any further damage is done.

The directors’ duties article mentions a new procedure termed a  “derivative” claim (CA 2006 s260) that allows shareholders to bring a legal action claim on behalf of the company against any director who is personally liable for any loss suffered by the company due to the “negligence, default of duty or breach of trust by the director”. Such claims are usually brought where a company’s directors and officers cause the company to violate the law, exposing the company to criminal or civil penalties, losses and serious litigation. This would not appear to be the situation present with the withheld documentation situation - yet.

Removed directors’ recourse

Even if the director is removed, if he is also an employee of the company he could have a case for wrongful or unfair dismissal - meaning more legal fees and a large settlement figure.

Section 994 of the 2006 Companies Act may also apply, as any attempt to remove a shareholder would enable that person to petition the Court on the grounds:

“(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

“(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

If a court considers that there has been unfair prejudice, it has a general power to make any order it sees fit. There are a wide range of remedies but, in the majority of shareholder dispute cases, the court will order the purchase of the minority director’s shares either by the other shareholders or by the company itself at a valuation set by the court. In addition, the court has the power to wind up the company - this again means legal costs and potential liquidation.

The case of RA Noble and Sons (1983) has similarities to the situation discussed with directors not getting on; it illustrates what can happen if everything ends up in court. The 1983 director was not interested in the company’s affairs and the other directors excluded him from the management. The judge held that the exclusion was prejudicial but not unfair because of the lack of interest. Nevertheless he was entitled to petition for the compulsory winding up of the company on the grounds that his exclusion from the management was not just and equitable.

So what to do?

It might be that the answer is just a simple passing of an ordinary resolution, but be warned if matters are not dealt with tactfully - if that’s not the case, then costly legal recourse could be required, as Tony Court suggested.

Jennifer Adams FCIS TEP ATT is a freelance writer and author specialising in tax and company secretarial issues, and can be contacted at Abacus Business Solutions

Replies (4)

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By grossalert
06th Sep 2012 11:36

Removing a Director

Jennifer's interesting article rightly references the case law and the various rights of action.  But for directors/shareholders to even talk about such rights, in an attempt to protect themselves, can quickly become a self-fulfilling prophecy and, before you know it, large amounts of personal monies are being drained away in litigation.......and usually the trading of the company and the confidence of staff begins to erode.

I suggest, as I am sure many do,  once you become aware of a rift, is to encourage the shareholders and director(s)  in question to try to access facilities to help them reach an agreed solution whether with or without resignation of the director(s) concerned.

I have advice on this area on my specialist site at www.BoardroomResolve.com and give a lot of advice to queries from the public on the subject on the Legal section of the  sister forum at UK Business Forum - btw  my comments are categorised into different  issues that arise between sheaeholders also at www.TheResolver.com .

 

 

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By tolland
23rd Jul 2014 17:07

removing directors with written resolutions??

In the paragraph "Removal of directors", I don't see how the change to CA 2006 s296(4) "made a useful procedural change in the allowing of written resolutions." is relevant to removing directors,as section 168 requires an ordinary resolution at a meeting, and a written resolution wouldn't be applicable...

http://www.legislation.gov.uk/ukpga/2006/46/section/168

 

 

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By AFIP-UK
04th Aug 2014 13:24

Removing Director with written resolution

Am I correct in my understanding of s239 CA2006?

Where the members wish to pass a resolution to ratify conduct of a director that amounts to negligence, default, breach of duty or breach of trust, this must be done by means of a resolution in respect of which the votes of the director concerned (if she is a member of the company) must be disregarded.  By virtue of this provision, a single director, if also a member of the company, would not be able to vote on a motion to ratify his/her own breach, only other members would be allowed to vote.

Where the resolution is proposed as a written resolution, neither the director concerned nor any member connected with her (e.g. spouse and shareholder?) is an eligible member. 

Does this mean neither the director nor his/her spouse are permitted to vote on such a resolution, and therefore the majority shareholder(s) can vote to remove the offending director and immediately replace him/her with a director of their choosing?

I would very much appreciate your informed view of this.

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By sylvia1973
22nd Feb 2016 22:26

Removal of Director

Hi,

 

I am a Director of a Community Interest Company, Limited by Guarantee. There are five Directors in total. In recent months there have been many unpleasant situations caused by one of the Directors, resulting in unnecessary delays in decision making and a well documented email trail of disrespectful comments and unfounded accusations. Three out of the five Directors find it impossible to work with this particular person and want them dismissed immediately. I have researched the procedures on line and it seems a rather straigh-forward process- as none of us are officially employed by the Company and we all carry our duties on voluntary basis. Has anybody on here gone through the process or could offer any tips to ensure that all processes are followed? Advice would be greatly appreciated.

Sylvia

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