How to Remove a Director from a Company Effectively

Removing a director from a company can be done in different ways, depending on your company’s constitution. Understanding how to properly remove a director from office will protect you and the company.

Before you begin the process of removing a director, it’s important to consider a few key practical and legal points. Keeping these factors in mind will help you reduce the risk of disputes, and ensure the process runs as smoothly as possible for everyone involved.

Check the Company’s Constitution

The Articles of Association

The first step in how to remove a director from a company is to check the company’s Articles of Association (the Articles), which act as your company’s rulebook. These articles often include specific provisions about how directors can be removed, like voting thresholds or procedures that need to be followed.

Some articles may even allow a director’s removal automatically under certain circumstances, like resignation, disqualification, bankruptcy, or incapacity, without needing a formal resolution. 

Generally, the Model Articles of Association for Private Limited Companies in England and Wales, allow directors to run and manage the company with the full power of the company. The Model Articles also contain a provision allowing decisions by the directors to be binding if passed by a majority vote.

So, a director could be removed from office, if it is voted for at a properly convened meeting of the board of directors and passed by a majority vote.

Shareholders’ Rights under the Companies Act 2006

Under Section 168 of the Companies Act 2006, shareholders hold significant power to remove a director from a company through an ordinary resolution passed at a general meeting. This means that if more than 50% of the shareholders voting at the meeting agree, the director will be removed.

However, the process must be fair and transparent: shareholders must give special notice of the proposed resolution at least 28 days before the meeting, and the director facing removal must be notified and given the right to respond, either in writing or in person at the meeting.

Check Any Shareholders’ Agreement or Director’s Service Agreement

Shareholders’ agreements often contain specific provisions that govern how directors can be removed. Particularly in companies where the directors and shareholders are the same people, shareholder agreements will include specific provisions about the removal of directors. Often offering them greater protection than allowed for under the Model Artlcies and Companies Act 2006

Similarly, a director’s service agreement may set out contractual rights, notice periods, or conditions related to removal, which could have financial or legal implications for the company.

Things To Keep in Mind

Filing with Companies House

When a director is removed from the company, it is a legal requirement to notify Companies House to keep the public records accurate and up to date. This is done by filing a form called TM01 (Termination of Appointment). The company must submit the TM01 form within 14 days of the director’s removal, providing details such as the director’s full name, the date they ceased to be a director, and other identifying information

It is important to bear in mind though that Companies House is only a register of what has actually happened. Just because someone files a TM01 with Companies House, it will not mean that you cease to be a director if you have not been removed from office properly, in accordance with the company’s constitution and the Companies Act 2006.

Employment Contracts

When a director is also an employee of the company, their employment contract adds another layer to the removal process. Removing someone as a director does not automatically terminate their employment, so the company must follow proper employment law procedures to end the employment relationship separately. 

This typically means giving notice or pay instead of notice as specified in the employment contract and ensuring fair dismissal procedures are followed to avoid claims of unfair dismissal, wrongful dismissal or discrimination.

Grounds for Removal

Although the Companies Act 2006 allows shareholders to remove a director by ordinary resolution even without stating a reason, having valid concerns like breach of duties, poor performance, or misconduct will be important if there is a director’s service agreement in place. They will also be important in ending the employment of a director who also has a status as an employee.

What Happens Between 50/50 Shareholders Where Both Are Directors?

When there are only two directors in a company, each holding 50% of the shares, removing one director will not be possible and leads to a deadlock within the company. This is because removing a director requires either a majority of directors or an ordinary resolution passed by a majority of shareholders.

In such cases, the company’s constitution, particularly if there is a shareholder agreement, may provide a way of dealing with a deadlock. These can include clauses such as forced share sale procedures, or even just a dispute resolution procedure. Readour article on Understanding Shareholder Agreements.

However, if the company constitution is based solely on the Model articles. Then there is no way to break the deadlock. If that is the case the directors will have to find a way to overcome the deadlock by negotiation or mediation.

In a deadlock situation, if one of the director/shareholders starts to work for him/herself only and against the interest of the company, the other party can bring court actions either based on a Derivative Claim or an Unfair Prejudice Petition, or apply for a Just and Equitable Winding Up of the company.

Feeling Confused?

If you find the process of removing a director overwhelming or confusing, you’re not alone, and that’s where we come in. We specialize in guiding directors and shareholders through every step of removing a director, ensuring compliance with legal requirements and company rules. Our experienced team of solicitors will provide clear advice, handle the paperwork, and help resolve any disputes smoothly.