Corporate governance and compliance - Appointment and remova...

Learning Outcomes

This article outlines the statutory framework and practical procedures for appointing, removing, and disqualifying company directors, including:

• Statutory requirements for appointing and removing directors in private and public companies, including minimum numbers, eligibility, filing obligations, and relevant model articles.
• Categories of directors—executive, non-executive, de facto, and shadow—and their effect on duties, liabilities, and the scope of disqualification.
• Legal procedures for director removal under section 168 CA 2006: special notice, the director’s right to representations, requisitioning a meeting when the board is uncooperative, and limits on written resolutions.
• Grounds and consequences of director disqualification under the Company Directors Disqualification Act 1986, including potential length of orders, compensation orders, and criminal and civil consequences of acting while disqualified.
• Application to SQE1-style scenarios, including the impact of Bushell v Faith clauses, interaction between articles, statutory provisions, and director employment contracts, and common pitfalls such as assuming removal terminates employment or that written resolutions can be used for removal.

SQE1 Syllabus

For SQE1, you are required to understand the statutory framework and practical procedures for appointing, removing, and disqualifying company directors, with a focus on the following syllabus points:

• The statutory requirements for the appointment of directors in private and public companies.
• The different types of directors and their legal status (executive, non-executive, de facto, shadow).
• The procedures for removing directors: section 168 CA 2006, special notice, director’s representations, requisitioning meetings, and limits on written resolutions.
• The effect of weighted voting clauses (Bushell v Faith) and their interaction with members’ statutory rights.
• Grounds and process for director disqualification under the CDDA 1986 and consequences of breach.
• The interaction between company articles, statutory provisions, and director employment contracts (wrongful dismissal, unfair dismissal, redundancy).
• Practical governance points: board and member decision-making, quorum, filings to Companies House, and updating statutory registers.

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.

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.

Types of Directors

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

Executive directors typically hold a service contract and run part or all of the business as employees. Non-executive directors provide independent oversight and challenge; they owe the same statutory duties as executives. De facto directors (s 250 CA 2006) and shadow directors (s 251 CA 2006) are caught by many duties and sanctions to prevent individuals evading responsibility: shadow directors can be disqualified, and de facto directors can be liable for wrongful trading and misfeasance just like de jure directors. The classification is fact-sensitive; someone who “occupies the position of director” or effectively instructs the board may be treated as a director despite the absence of formal appointment.

Appointment of Directors

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

• Private companies must have at least one director (s 154(1)).
• Public companies must have at least two directors (s 154(2)).
• At least one director must be a natural person (not a company) (s 155).
• The minimum age is 16 (s 157).
• Appointment of the first directors is made on incorporation via Form IN01. Subsequent appointments are usually governed by the articles.

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.

Under the model articles for private companies limited by shares (MA 17), a director may be appointed either by a decision of the directors or by an ordinary resolution of the members. Appointed directors must consent to act, and the company must notify Companies House of a new director within 14 days (form AP01 for an individual; s 167 CA 2006). The register of directors and the register of directors’ residential addresses must be updated (ss 162 and 165).

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

Board practice and governance points:

• A valid board decision generally requires a quorum (model articles set quorum for board meetings at two, unless the company has a sole director—MA 11).
• Decisions can be taken at a board meeting or, if all directors agree, by unanimous consent without a meeting (MA 7–8; Charterhouse Investment Trust Ltd v Tempest Diesels Ltd).
• Public companies often operate “retirement by rotation” under their articles; listed companies typically follow annual re-election under the UK Corporate Governance Code.

Restrictions on Appointment

Certain persons are prohibited from acting as directors:

• Individuals under 16 years of age (s 157).
• Undischarged bankrupts (unless court permission is obtained) and persons subject to bankruptcy restrictions.
• Persons disqualified under the Company Directors Disqualification Act 1986 (CDDA 1986).
• A company’s auditor cannot be appointed as its director (s 1214 CA 2006).

Corporate directors are permitted provided the company has at least one natural person as director (s 155). Future reforms may restrict corporate directors further, but the current requirement is that at least one director must be a natural person.

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 (ss 168(2), 312(1)).
2. The company must send a copy of the notice to the director concerned. The director has the right to make written representations and to speak at the meeting (s 169).
3. The company should send notice of the general meeting to members. If it is not practicable to give the full 28 clear days’ meeting notice, there is a fallback route—publish notice at least 14 days before the meeting by newspaper advertisement or in a manner permitted by the articles (s 312(3)).
4. The resolution is passed by a simple majority (ordinary resolution) at a general meeting. A written resolution cannot be used to remove a director (s 288(2)(a)).

If the board refuses to put the removal resolution on a general meeting agenda, members can requisition a meeting:

• Members holding at least 5% of paid-up capital carrying voting rights may require the directors to call a general meeting (s 303). The board must call the meeting within 21 days so it takes place within 28 days of the notice (s 304).
• If the board does not call the meeting, the requisitionists may do so themselves (s 305). The meeting must be held within three months of the request. Reasonable expenses can be recovered from the company (s 305(6)).
• Special notice remains valid even if the general meeting is called sooner than 28 days after receipt (s 312(4)).

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

Administrative follow-up:

• Notify Companies House of the termination within 14 days (form TM01; s 167).
• Update the register of directors and the register of directors’ residential addresses (ss 162 and 165).
• Minute the general meeting and board meetings and retain records for at least 10 years (ss 248 and 355).

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. Such clauses operate by conferring weighted voting rights only for resolutions to remove a director.

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.

Bushell-style protection cannot remove the members’ statutory right to propose and vote on removal, but it can decisively alter the voting outcome on a removal resolution. Always check the articles for any special weighting provision confined to removal.

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 (contractual notice pay) or, for qualifying executive directors, potentially unfair dismissal or redundancy pay (subject to statutory requirements and two years’ qualifying service for unfair dismissal).

Other employment-related points:

• A payment in lieu of notice (PILON) clause may allow immediate termination with payment for the notice period.
• Restrictive covenants in the service contract (restraint of trade) must protect a legitimate business interest and go no further than necessary to be enforceable.
• Directors’ service contracts exceeding two years require member approval by ordinary resolution (s 188). Without approval, the contract is void to the extent it contravenes the section, and terminable on reasonable notice.

Separation of corporate and employment roles is critical: removing a director under s 168 does not automatically dismiss the person from employment. Conversely, ending employment does not itself remove a director from office unless the articles provide for automatic vacation.

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 and applies to de jure, de facto and shadow directors.

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 trading under s 214 IA 1986; fraudulent trading under s 213 IA 1986; misfeasance under s 212 IA 1986).
• Persistent breaches of company law (e.g., failure to file returns and accounts).
• Conviction for serious offences related to company management.
• Breach of competition law or conduct making the person unfit to manage a company.

Disqualification can last from 2 to 15 years. Persons subject to disqualification may offer a voluntary disqualification undertaking. Acting while disqualified is a criminal offence; civil consequences include potential personal liability, and the court can make a compensation order requiring payment to creditors for losses caused by the misconduct. A disqualified person may seek court leave to act in management (subject to stringent conditions).

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).

Worked Example 1.3

The board declines to place a shareholders’ removal resolution on the agenda for the next general meeting. Members holding 7% of voting capital wish to proceed. What procedural steps are available?

Answer:
The members can requisition a general meeting under s 303 CA 2006 (threshold 5%+). The board must call the meeting within 21 days so it occurs within 28 days of the notice (s 304). If the board still fails to act, the requisitionists may themselves call the meeting under s 305, ensuring it is held within three months of the request and recovering reasonable expenses from the company.

Worked Example 1.4

Director E is both a board member and an employee with a three-year fixed-term service contract. The company validly removes E under s 168 CA 2006. There was no prior member approval for the long-term service contract. What are the contractual consequences?

Answer:
Removal from office under s 168 does not terminate employment. Without member approval under s 188, the contract is void to the extent of contravention and becomes terminable on reasonable notice. E may be entitled to damages for wrongful dismissal or other employment remedies depending on the terms and statutory rights, but the company can rely on s 188 to limit contractual exposure.

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 (ss 154–157; s 155 natural person).
• The different types of directors: executive, non-executive, de facto, and shadow directors, and how duties and sanctions apply to each.
• The process for removing a director by ordinary resolution under s 168, including special notice (s 312), the director’s right to make representations (s 169), and that written resolutions cannot be used (s 288(2)(a)).
• Requisitioning a general meeting if the board is uncooperative (ss 303–305) and practical time frames for notices and meetings.
• Filing and record-keeping: notify Companies House (TM01) within 14 days, update statutory registers, and retain minutes (ss 162, 165, 167, 248, 355).
• 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, including lengths of orders and compensation orders; acting while disqualified is a criminal offence.
• The employment law consequences of director removal and the need for shareholder approval for long-term service contracts (s 188).

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