Corporate governance and compliance - Appointment and removal of directors

Learning Outcomes

After studying this article, you will be able to:

  • Identify the statutory requirements for appointing and removing directors in private and public companies.
  • Distinguish between executive, non-executive, de facto, and shadow directors.
  • Explain the legal procedures for director removal, including shareholder rights and special notice.
  • Recognize the grounds and consequences of director disqualification.
  • Apply these principles to SQE1-style scenarios and avoid common exam pitfalls.

SQE1 Syllabus

For SQE1, you are required to understand the appointment and removal of directors as part of corporate governance and compliance. Focus your revision on:

  • The statutory requirements for the appointment of directors in private and public companies.
  • The different types of directors and their legal status.
  • The procedures for removing directors, including shareholder rights, special notice, and the effect of weighted voting clauses.
  • The grounds and process for director disqualification under the Company Directors Disqualification Act 1986.
  • The interaction between company articles, statutory provisions, and director employment contracts in these contexts.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the minimum number of directors required for a private limited company and a public limited company?
  2. Which statutory procedure must be followed to remove a director from office, and what notice is required?
  3. What is a Bushell v Faith clause, and how can it affect the removal of a director?
  4. Name two grounds on which a director may be disqualified under the Company Directors Disqualification Act 1986.

Introduction

The appointment and removal of directors are central to effective corporate governance and compliance. Directors are responsible for managing the company’s affairs and ensuring compliance with statutory and fiduciary duties. The Companies Act 2006 and related legislation set out the legal framework for who can be a director, how directors are appointed or removed, and the consequences of misconduct or unfitness.

Types of Directors

A company’s board may include several categories of directors, each with distinct roles and legal implications.

Key Term: executive director
An executive director is involved in the day-to-day management of the company and is usually a full-time employee.

Key Term: non-executive director (NED)
A non-executive director is a board member who does not participate in daily management but provides oversight and independent judgment.

Key Term: de facto director
A person who acts as a director without formal appointment but assumes the role and functions of a director.

Key Term: shadow director
A person in accordance with whose instructions or directions the board is accustomed to act, except when advice is given in a professional capacity.

Appointment of Directors

The Companies Act 2006 prescribes minimum requirements for board composition and eligibility.

  • Private companies must have at least one director.
  • Public companies must have at least two directors.
  • At least one director must be a natural person (not a company).

Key Term: natural person
An individual human being, as opposed to a legal entity such as a company.

Directors are usually appointed in one of three ways:

  • By the initial incorporation documents (first directors).
  • By the board of directors (if permitted by the articles).
  • By shareholders passing an ordinary resolution at a general meeting.

Directors must consent to act and their appointment must be notified to Companies House within 14 days.

Key Term: ordinary resolution
A resolution passed by a simple majority (more than 50%) of votes at a general meeting or by written resolution.

Restrictions on Appointment

Certain persons are prohibited from acting as directors:

  • Individuals under 16 years of age.
  • Undischarged bankrupts (unless court permission is obtained).
  • Persons disqualified under the Company Directors Disqualification Act 1986.

Removal of Directors

Shareholders have a statutory right to remove a director by ordinary resolution under section 168 of the Companies Act 2006, regardless of the company’s articles or the director’s contract. However, strict procedures must be followed.

Key Term: special notice
Notice of at least 28 days given to the company of the intention to propose a resolution to remove a director.

The process is as follows:

  1. Special notice of the intention to remove a director must be given to the company at least 28 days before the meeting.
  2. The company must send a copy of the notice to the director concerned.
  3. The director has the right to make written representations and to speak at the meeting.
  4. The resolution is passed by a simple majority (ordinary resolution) at a general meeting.

Key Term: general meeting
A meeting of company members (shareholders) at which decisions are made by voting on resolutions.

Weighted Voting and Bushell v Faith Clauses

The company’s articles may include provisions that affect the removal process. A Bushell v Faith clause gives a director extra votes on a resolution to remove them, making it harder or impossible for shareholders to achieve the required majority.

Key Term: Bushell v Faith clause
An article provision granting a director enhanced voting rights on a removal resolution, effectively protecting them from removal by ordinary resolution.

Employment Law and Removal

If a director is also an employee, removal from the board may breach their employment contract, entitling them to damages for wrongful dismissal or, for executive directors, potentially unfair dismissal or redundancy pay (subject to statutory requirements).

Disqualification of Directors

Directors may be disqualified from acting as directors or being involved in company management under the Company Directors Disqualification Act 1986 (CDDA 1986). Disqualification is a serious sanction for misconduct or unfitness.

Key Term: disqualification order
A court order prohibiting an individual from acting as a director or being involved in company management for a specified period.

Common grounds for disqualification include:

  • Misconduct in an insolvent company (e.g., wrongful or fraudulent trading).
  • Persistent breaches of company law.
  • Conviction for serious offences related to company management.
  • Breach of competition law.

Disqualification can last from 2 to 15 years. Acting while disqualified is a criminal offence and may result in personal liability for company debts incurred during the breach.

Worked Example 1.1

A private company has three directors: A, B, and C. The shareholders wish to remove director B due to poor performance. The company’s articles contain a Bushell v Faith clause giving B three votes per share on a removal resolution. The shareholders hold a general meeting and vote to remove B, but B’s weighted votes defeat the resolution. Can B be removed?

Answer: No. The Bushell v Faith clause gives B sufficient voting power to block the ordinary resolution, so B cannot be removed by this process.

Worked Example 1.2

Director D of a public company is found to have continued trading and incurring debts when the company was clearly insolvent. The liquidator applies for a disqualification order. What is the likely outcome?

Answer: The court may make a disqualification order against D for unfit conduct in an insolvent company, prohibiting D from acting as a director for a period (typically 2–15 years).

Exam Warning

The removal of a director under section 168 CA 2006 does not terminate their employment contract. The company may still be liable for notice pay or damages for wrongful dismissal if the director is also an employee.

Revision Tip

Always check the company’s articles for Bushell v Faith clauses or other provisions affecting director removal. For SQE1, know the statutory process and the effect of special notice.

Key Point Checklist

This article has covered the following key knowledge points:

  • The statutory requirements for the appointment of directors in private and public companies.
  • The different types of directors: executive, non-executive, de facto, and shadow directors.
  • The process for removing a director by ordinary resolution, including the need for special notice and the director’s right to respond.
  • The effect of Bushell v Faith clauses and the interaction between articles and statutory rights.
  • The grounds and consequences of director disqualification under the CDDA 1986.
  • The employment law consequences of director removal.

Key Terms and Concepts

  • executive director
  • non-executive director (NED)
  • de facto director
  • shadow director
  • natural person
  • ordinary resolution
  • special notice
  • general meeting
  • Bushell v Faith clause
  • disqualification order
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