Dismissing a company directory can potentially raise a number of issues, and the exit can quickly become contentious if not handled well.
In this guide, we outline the key considerations for companies looking to dismiss a company director.
Company directors have certain rights and responsibilities, over and above those of employees and workers.
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.
Dismissing a director who is also an employee
Except in circumstances of gross misconduct, you would not ordinarily be allowed to dismiss a director/employee immediately and without the required notice or PILON.
The notice time should be included in a clause of the director’s employment contract, but such conditions are frequently insufficient under the circumstances.
If there is no contract, you must determine whether the director was an employee based on all available information and rely on statutory notice periods. Although some directors are self-employed, caution should be exercised in relying too heavily on a role’s ‘title.’ If you’re unsure, the common law “control test” is a decent place to start:
- Is the employer bound to supply employment, and the individual has committed to undertake that labour and be compensated for it? This is known as mutuality of obligation.
- Does the employer have the right to control and monitor the employee, even if this right isn’t used on a regular basis?
- Can the individual delegate their responsibilities to someone else, known as ‘personal service’?
You may want to consider suspending the director pending the conclusion of any investigations into misbehaviour, but in order to protect the company from a claim of unfair dismissal, you should give proper notice of the suspension with clear grounds. Suspension should only be used in circumstances when substantial allegations against the director have been made.
Employees with more than two years of continuous employment, whether or not they are also directors, have statutory rights, including the right to not be fired unfairly. Termination will be automatically classified as unjust in circumstances of discrimination, exposing your organisation to a claim in an employment tribunal.
There are several procedures to follow when directors are also employees, and it is arguably more vital that the correct approach is followed. If you have any doubts, you should get legal advice before acting.
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.
DavidsonMorris’ employment lawyers bring particular expertise in dealing with complex, sensitive exits including company director dismissals. As well as advising on specific cases, we can review HR policies and processes to ensure they are effective in reducing legal risk relating to director issues. Contact our experts for advice.
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.
Last updated: 26 January 2021