In the intricate web of corporate governance, the removal of directors is a process often fraught with potential pitfalls. Many company stakeholders, whether due to ignorance or oversight, may not adhere to the correct procedures for such dismissals. However, failure to follow the prescribed steps can lead to significant legal ramifications and financial repercussions for all parties involved. Understanding the correct process for director removal is paramount to maintaining compliance and avoiding costly consequences.
The foundation for the removal of directors typically lies within a Company’s Articles of Association. These Articles serve as the constitutional framework governing the internal management and operations of the company. If a company has been incorporated under Model Articles, readily accessible online for companies limited by shares incorporated after 2013 in the UK, automatic provisions for director removal are limited to:
There are no other automatic provisions allowing for removal of the director under the Model Articles. Under the Model Articles, a director can otherwise be removed only by an ordinary resolution of shareholders. An ordinary resolution requires the affirmative vote of at least 50% plus 1 share of the shareholders present at a general meeting. It is important to note that this vote cannot be done by a written resolution as the director has a right to be present and speak at the general meeting where the question of removal from office is raised. This democratic process ensures that significant shareholder support is garnered before a director is ousted from their position of authority within the Company and the director is given the opportunity to put forward their case against removal from office.
Moreover, this process is governed by a strict legal framework contained in sections 168 and 169 of the Companies Act 2006 (Act). Adherence to this legislation is crucial, as failure to comply can result in severe consequences for the company and its stakeholders.
Where the shareholders of at least 5% of the voting share capital in the Company have demanded the removal of the director, the board must send out a notice calling a general meeting within 21 days of receipt of the requisition, with such meeting itself taking place within 28 days of the notice. Should the board fail to do so within the timeframe stipulated, the requisitioning shareholders will have the right to call this meeting in place of the board.
Simultaneously as calling the general meeting, a special notice must be given to the director whose removal is sought by the requisitioning members, or indeed the board. Such notice must be given no later than 28 days before the general meeting where the resolution is to be considered is to be held. Failure to give such notice will be fatal to any resolution passed at the general meeting for the director’s removal.
The director, whose removal is to be considered at the general meeting, must also be given the opportunity to put forward their case against dismissal at the general meeting, whether in writing or verbally thereat. Once again, this right is absolute and failure to provide the director with this opportunity will lead to any resolution removing the director from office being open to challenge.
At the general meeting, shareholders must pass an ordinary resolution to remove the director from office. An ordinary resolution requires the affirmative vote of at least 50% plus 1 share of the shareholders holding voting shares in the Company. This democratic process ensures that the decision to remove a director is supported by a majority of shareholders.
It is essential to approach the removal of directors with meticulous attention to detail and adherence to legal requirements. Failure to do so can expose the company to legal challenges and potential liabilities. An aggrieved director may seek remedies through the courts, including reinstatement to their position, if they believe the removal process was flawed or unfair.
Moreover, the defaulting members or other directors involved in orchestrating the dismissal may face substantial costs penalties resulting from court action by the director, which can escalate into tens of thousands of pounds. These penalties serve as a warning against arbitrary or improper director removals and underscore the importance of conducting such actions with diligence and caution. Following the correct procedure to rectify the defect may not halt any court action lodged by the aggrieved director and curing the defect will not insulate the delinquents from costs consequences for legal costs incurred by the director.
Given the complexities and legal implications inherent in the removal of directors, obtaining comprehensive legal advice is imperative. Professional guidance can help navigate the intricacies of the process, ensuring compliance with relevant laws and regulations while mitigating potential risks and liabilities.
IMD Corporate stands as a trusted partner with extensive experience in company and board restructuring. Our team possesses the expertise and insight necessary to guide companies through the director removal process effectively. By leveraging our knowledge and resources, we help clients navigate potential pitfalls and achieve successful outcomes while upholding the highest standards of corporate governance.
In conclusion, the removal of directors is a process that must be approached with utmost care and adherence to legal requirements. Whether outlined in a Company’s Articles of Association or governed by the Companies Act 2006 in case of Model Articles, the correct procedure for director removal must be followed meticulously to avoid legal challenges and financial penalties. Seeking professional legal advice, such as that offered by IMD Corporate, is essential to navigating this process effectively and ensuring compliance with regulatory standards.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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