Resignation or removal of directors: Get the details right
Jennifer Adams looks at the procedure by which a director leaves a company – whether that director goes on his own accord for his own reasons, is asked to leave or is forced to leave through disqualification.
The vast majority of directors leave a company amicably through resignation rather than being forced to leave but they may have no choice is disqualified (for detail on disqualification of directors see the article Directors Disqualification: Get the details right.
Method of resignation
Whatever the reasons for leaving, there should be a set procedure in place to cover both the company and the relevant director. Ideally there will be a directors' service contract containing the necessary provisions, inter alia, any notice period, the agreement that the resigning director be required to sell any shares held on resignation and an obligation to resign as a director upon any termination of employment. If it is wished that the resigning director remains an employee after resignation, then that can also be included in the contract.
In small private limited companies invariably there will be no director's service contract and unless specific provisions can be found in the company's Articles requiring the director to give a period of notice, a director may resign at any time just by giving notice to the company. Ideally, the notice should be in writing, but this is not specifically required under the Companies Act 2006.
Whilst now relatively unusual, in some cases a company’s Articles can require the board to formally approve any director resignation but the usual procedure is for the leaving director just to give notice in writing and leave after a set notice period.
Model Articles Clause 18 states that "a person ceases to be a director as soon as…
(f) notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms."
In many companies, the power to remove a director from office is granted to the board of directors or to a majority shareholder under the company’s Articles of Association. For these companies, removing a director is a relatively straightforward matter, usually requiring the serving of a written notice on the director in question.
If Table A of the Companies Act 1985 is used a director can be removed if he is absent without permission of the rest of the board for 6 months from board meetings held in that period and the directors so resolve.
Practicalities of removal by Ordinary resolution with Special Notice ('Statutory procedure')
The Model Articles are silent on the matter of director removal. Without express provision in either the service contract or Articles, it may take time to force a director out as the only way will be under s 168 CA 2006 – removal by ordinary resolution by shareholders - otherwise the company must to go to court to force the resignation.
The company's members can apply for a director to be removed under s 168 and s312 CA 2005. The following procedure is required:
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- The notice of intention is via a letter to the company proposing the resolution and stating that Special notice is being given.
- The notice must be lodged at the company's Registered Office at least 28 clear days before either the next AGM or general meeting (s312 CA 2006). The reasons for the intention to remove and the directors' representations, if any, must be given to all shareholders entitled to attend the meeting.
- The resolution is an ordinary resolution with Special Notice and as such requires a simple majority (50.01%) of those present at that meeting or by proxy.
- The required notice period for the convening of a general meeting is 14 days.
- At the meeting the director must be given opportunity to voice his representations before the vote is taken.
This method of removal does not necessarily prejudice any subsequent action for breach of contract and can be used to remove a director even if the company’s Articles contain a provision which excludes sections of the Companies Act from applying.
Bushell v Faith clause
Including this type of clause in the company's Articles enables protection for a director from being forcibly removed by the other shareholders. Such a clause confers enhanced voting rights on the director who is being removed (provided he/she is also a shareholder) by a factor large enough such that the other shareholders cannot achieve the requisite majority for the resolution to be passed. If such a clause is required then rather than include in the Articles, consideration should be given to having an appropriate shareholders' agreement of the clauses which supplement the company’s articles by dealing with aspects of the relationship between the parties that would otherwise not be covered.
Alternative to s 168 CA 2006
Rather than going down the time consuming s168 route and if enough shareholders' agree, then the Articles can be changed to accommodate a resignation procedure. Amendment of Articles of a private limited company can be undertaken by written special resolution requiring a 75% majority.
What are the practicalities following a resignation?
Typical notice periods are of three months or more which should be enough time to find a replacement, if required. Any compensation for loss from office is covered under s215 to s212 CA 2006. In particular, s217 (1) states that:
"A company may not make a payment for loss of office to a director of the company unless the payment has been approved by a resolution of the members of the company".
When a director leaves office there are a number of considerations for the company:
However the termination arises, it is the company's responsibility to notify Companies House of the termination. The company must send a copy of the agreed resolution and a completed form TM01 within 14 days of the director leaving.
- Updating the company’s statutory registers – namely the Register of directors, the Register of directors’ residential addresses, the PSC Register and the Register of Transfers, if kept
- Approve share transfers by resolution at a directors' meeting
- Cancel any existing share certificates, and issue new share certificates for shares to the remaining shareholders who are taking up the shares otherwise the shares can be cancelled
- Inform the company's bank and remove from bank and other mandates
- Inform the directors’ and officers’ liability insurer
- Inform employees, major customers and suppliers
- Issue P45, if salaried
- Remember to include details of the transfer in the next annual return filed with Companies House
If the person resigning is the sole individual director then a replacement is needed in line with s154 to s 156 Companies Act 2006 which requires a private limited company to have at least one director who is a "natural person". If no director the secretary of state may issue a direction for a director to be appointed but in practice Companies House will strike off the company after giving written warning so long as HMRC does not object.
Practical Point: When all directors resign
Although no board resolution is technically required upon a director resigning, it is good practice to record that the resignation has occurred at the next directors' board meeting.