Appointment and removal of company directors
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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.
We deal with the appointment of new directors in the first part of the article and in the second part, with the removal of directors from office.
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, that director must be a human person - as opposed to another company. A public limited company (or “plc”) must have at least two directors.
Who appoints directors and what is the process?
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.
When a vacancy arises unexpectedly, the remaining directors may appoint a new director temporarily. His 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.
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 director, changes the balance of management power. Every shareholder should be aware of this.
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 web filing service. Alternatively, form AP01 or AP02 could be used.
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, he or she may hold office provided that:
- he or she has not been disqualified by a court from being a director (a court can overturn previous disqualifications)
- he or she is not an undischarged bankrupt (unless allowed by a court)
- he or she is 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.
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 of a director 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 he is, his contract must comply with employment law. If he is not, then his contract is entirely a matter between him and the company. As in any other situation, the question of whether or not he 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.
A director holds office at the wish of the shareholders. He can be removed by a 50% vote at a meeting of the shareholders. The meeting need give no reason. A single majority shareholder automatically carries over 50% so he alone can remove a director.
This right cannot be taken from them 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, he will have a right to damages if he chooses to go to court.
Although a reason for removal need not be given, it usually is. Common reasons are:
- disqualification under the law
- mental disorder under the Mental Health Act 1983
- breach of his service contract
- his resignation from office or
- absence from a board meeting for a consecutive period of six months
A director may be removed from office in one of the following ways:
Removal by ordinary resolution
Any member wanting to propose a resolution to remove a director must give the company 'special notice', (a formal notice setting out his 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 be 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. He 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 him. Executive directors, however, are exempt from this requirement.
Disqualification by the court
The Court has power to disqualify a person from holding the office of director. It can also remove the disqualification.
Usually, to be disqualified by the Court, a director must be shown to be incompetent to hold the post. Examples are: conviction for an offence related to running a company; or persistent failure to comply with rules for filing documents at Companies House.
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. This is unusual and it is not recommended that articles be edited to make any such provision. It is easy to remove a director without reference to the articles.
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 web filing service.
There may be a procedural requirement in the company's articles of association too.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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