This article explains how to appoint and remove company directors from office. It will be useful reading for directors and shareholders of any private limited company across the UK.
Appointing directors
Must a company have directors, and if so, how many?
Every limited company must have at least one director. If a limited company has only one director, they must be a human person - not another company.
A public limited company (or 'plc') must have at least two directors.
Who appoints directors?
Most commonly, directors are appointed by the shareholders at the Annual General Meeting (AGM), or in extreme circumstances, at an Extraordinary General Meeting (EGM). A resolution for the appointment is put to a vote, and passed if a majority of shares are voted in favour.
Temporary appointments
When a vacancy arises unexpectedly, the remaining directors may appoint a new director temporarily. Their appointment must be confirmed by the shareholders in general meeting as soon as possible. This would be appropriate for example, on the death of a director who represented an institutional lender-shareholder. Another example might be the unexpected departure of a technical director from a science based business where there was an obvious successor.
Delegating power to appoint
The shareholders, or an appointed committee of them, may delegate the power to appoint a new director to the existing directors. Delegating the power to appoint may be convenient for shareholders, but does remove a key shareholder power.
In most circumstances, a proposal for a new director would be a matter for discussion between the shareholders and directors at leisure and not something for an immediate decision. In terms of power and tactics, of course the absence of a director and / or the appointment of a new one changes the balance of management power. Every shareholder should be aware of this.
What is the process for appointing a new director?
The process for appointing new directors is usually recorded in the company's articles of association. It is not the same for all companies. The number of directors may be limited by the articles of association, so that a new director may be appointed only if a vacancy arises.
The company must notify Companies House within 14 days after a new director is appointed. The easiest way to do this is to use the CH WebFiling service. Alternatively, form AP01 or AP02 could be used.
You should also update the company's statutory register of directors. This is the record kept at the registered office or SAIL address and which is available for public inspection.
The information that you will need to record is:
- company name
- company registration number (CRN)
- date of appointment of the new company director
- title, full name (all forenames and surname) and any former names
- date of birth
- residential address
- service address
- the director's occupation
- nationality
Who may not be appointed a director?
A director may be an individual or another legal 'person' (such as a company). If the director is an individual, they may hold office provided that they:
- have not been disqualified by a court from being a director (a court can overturn previous disqualifications);
- are not an undischarged bankrupt (unless allowed by a court); and
- are not under the age of 16.
An appointment must comply with the company's articles of association. These can contain whatever rules the shareholders agree, for example, limitation of the number of family relatives who are also directors.
Appointing a corporate director
The process for appointing a corporate director (another company) is no different to that for a natural (human) director.
However, a company must have at least one natural director if it has a company as another.
Once the company has been appointed, the following details should be filed at Companies House using Form AP02:
- company name
- company registration number
- date of appointment
- registered company name and number
- registered office or principal address
- registration place
- legal form and governing law (for non-EEA corporate directors)
Directors' service contracts and employment agreements
It is still often assumed that directors have a service agreement and everyone else has a contract of employment. But because the rules for the employment are exactly the same as those for employing anyone else, this distinction is irrelevant. If your director wants to feel he has a service agreement, by all means use that label.
Every director requires a director's service contract. This is a legal requirement. A non-executive director may or may not be employed. If they are, their contract must comply with employment law. If they are not, then their contract is entirely a matter between them and the company. As in any other situation, the question of whether or not they is employed is not a matter of your choice, but a question of law.
Nonetheless, the contract between a company and an executive director does usually cover the director’s duties and benefits at greater length because they are more important and more extensive than those of the average employee.
Net Lawman provides a service agreement for a paid executive director, a service agreement for a non-exec director and an unpaid directors service agreement.
Removing directors
A director may be removed from office in one of the following ways:
Removal by ordinary resolution
A director holds office at the wish of the shareholders.
They can be removed by passing an ordinary resolution at a meeting of the shareholders. The meeting need give no reason.
An ordinary resolution is one that is passed on a majority vote of the shareholders, that is those owners holding between them more than 50% of the ordinary voting rights.
A single majority shareholder automatically carries over 50% so they alone can remove a director without the support of other owners.
This right to remove cannot be taken from the shareholders by anything contained in the director's service contract or in the Articles of Association. However, if a removal is in breach of the director’s service contract, or the terms of a shareholders’ agreement, the removed director will have a right to damages if they choose to go to court.
Although a reason for removal need not be given, it usually is. Common reasons are:
- disqualification under the law
- bankruptcy
- mental disorder under the Mental Health Act 1983
- breach of their service contract
- their resignation from office or
- absence from a board meeting for a consecutive period of six months
Any member wanting to propose a resolution to remove a director must give the company 'special notice', (a formal notice setting out their request) at the registered office of the company at least 28 days before a general meeting.
The directors may try to frustrate the members' intention by not calling a general meeting at all.
In this situation, a member who owns at least 10% of the voting shares in the company can request an extraordinary general meeting at which the proposal is put to the vote.
Whenever the company receives special notice of a resolution to remove a director, the board must ensure that the director concerned is informed immediately. That director has the right to make written representations to the members. They may also speak at the meeting.
Retirement by rotation
At each annual general meeting of the company, one-third of the total number of directors must retire from office and be subject to re-election. Shareholders can remove a director from the board simply by failing to re-elect them. Executive directors, however, are exempt from this requirement.
Disqualification by the court or other authority
The Court has power to disqualify a person from holding the office of director for up to 15 years.
It can also remove a disqualification.
Usually, to be disqualified by the Court, a director must be shown to be incompetent to hold the post, not meeting the requirements of the role given in the Companies Act 2006 and/or the articles of association.
A disqualified company director is also prohibited from holding an office in any other company for the duration of the ban.
The disqualification extends to holding a directorship of a foreign company with UK connections; forming, marketing or running another company; and being a partner of a Limited Liability Partnership (an LLP).
Violation of the terms of a disqualification order can lead to a considerable fine or a prison sentence of up to 2 years.
Company directors can be disqualified immediately if they:
- are not at least 16 years old (the minimum age requirement)
- are declared bankrupt or become subject to bankruptcy proceedings
- are served with a Debt Relief Order
- continue to trade when they should reasonably know that company is insolvent
- fail to maintain accurate accounting records
- fail to file required documents at Companies House, including annual financial statements and the confirmation statement
- fail to pay corporation tax or any other taxes
- use company finances or assets for personal gain or benefit
- fail to maintain any other statutory duties as per the Companies Act 2006
Alternatively, an application to investigate a director can be made to Companies House, the Insolvency Service, the Insolvency Service, HMRC, the Competition and Markets Authority, the Financial Conduct Authority or a company insolvency practitioner.
Following a complaint, a letter will be sent to the director describing: the allegations, the intention to proceed with an investigation and how the director may respond.
Companies House holds a Disqualified Directors Register. This information records the details of all disqualified directors and is available to the general public.
Removal under the company's articles of association
A company's memorandum and articles of association can also specify circumstances when a director may be disqualified.
If you are a director being removed, it is therefore advisable to check the company's articles (which can be done via Companies House online) to see if there are provisions that would require the immediate removal of a director.
Many companies do not change from using the default 'model' articles of association. These do give a number of provisions require the removal of a director, but all reflect events that would prohibit the director from taking office if they were not already appointed, such as being diagnosed as incapable of remaining in office by a registered medical practitioner.
Given that it is easy to remove a director without reference to the articles, we recommend that any company's articles do not mention circumstances in which a director can be removed at all.
Process to be followed when someone stops being a director
The remaining directors must notify Companies House within 14 days of the removal, retirement or resignation of a director. Form TM01 could be used, or the CH WebFiling service.
There may be a procedural requirement in the company articles of association too.