Removal of Director by Members under Companies Act 2006

     

 Removal of Director by Members under Companies Act 2006

The members of a company have a statutory power to remove a director from office at any time by passing an ordinary resolution for that purpose (section 168(1) CA 2006). That section also provides that the members’ right of removal applies notwithstanding the terms of any contractual or other agreement between the director and the company, meaning that the power is exercisable with respect to executive directors with contracts of employment with the company as it is to any other type of director.

The law affords certain rights to a director whom the members, or some of them, wish to remove. Firstly, the resolution needs to be considered at a general meeting of the company, meaning that removal cannot be effected by means of a process of correspondence. Secondly, ‘special notice’ must be given of the intention to table the resolution: this means that 28 days notice of the meeting must be given to the company. Thirdly, the director has the right under section 169 CA 2006 to protest against the proposal to remove him or her. The director has the right to speak to the resolution when it is tabled at the meeting and is entitled to require the company to circulate to the company’s members, in advance of the meeting, any written representations (provided they are of a ‘reasonable length’) that he or she prepares concerning the resolution. If the representations are not sent out as required, the director can insist that they are read out at the meeting.

A company which is presented with a request that it circulate representations in these circumstances may, however, apply to the court for a determination that the director’s rights under section 169 are being ‘abused’. If the court is satisfied that this is the case, the company will not be bound to circulate the representations and the court may even make the director liable to pay part or all of the company’s legal costs. Even where the company succeeds in such an application, though, this will not affect the director’s right to be heard on the resolution at the meeting.

While section 168 appears to be quite a straightforward route for removing a director, in practice it may not always be an easy thing for ordinary members to achieve. For one thing, a company which is presented with the special notice required by the Act is not actually obliged to convene the necessary meeting to consider the resolution (Pedley v Inland Waterways Association Ltd [1977] 1 All ER 209). This means that the members who wish to remove a director may be required, additionally, to muster sufficient support – that is, members representing 10% of the company’s paid-up share capital or (in the case of a company without share capital) 10% of its membership – to require the company’s directors to convene a general meeting under section 303 CA 2006. Alternatively, in the case of a public company (which is required by law to hold an AGM), the members may opt to oblige the company to table the resolution at a forthcoming AGM, in which case the threshold of support they will need to muster in order to require the inclusion of the resolution on the agenda will be 5% of the total voting rights in the company or at least 100 members with voting rights who have paid up an average of at least £100 each on their holdings (section 338 CA 2006).

While the members may have power under section 168 to remove a director from office, this could prove an expensive matter for the company where the director has a contract with the company entitling him or her to compensation or damages for dismissal during the period of the contract.

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