In our first article looking at issues arising out of the case of Mitt Wearables (“Mitt”), we discussed the issues that arise from inconsistent agreements. In this article we look at how to remove a director.
Background
Mr Lakey was appointed as a director of Mitt on 26 June 2018. By the end of September 2019, following a decline in the relationship between Mr Lakey and Mr Macabuag (Mitt’s founder) and allegations of misconduct against Mr Lakey, Mitt was taking advice on the removal of Mr Lakey as an employee and director. On 8 October 2019, Mr Lakey was suspended on allegations of misconduct following an investigation by an independent barrister, who found that some of the allegations against Mr Lakey were made out. In respect of those allegations, the report determined that Mr Lakey had committed "serious breaches of duties or obligations that he owes to the Company". Mr Lakey was also found to have been in breach in respect of his post-suspension access to Mitt’s Google Drive.
On 19 December 2019, Mr Lakey’s employment and directorship were terminated by letter. Due to the circumstances of Mr Lakey’s termination, and in accordance with Mitt’s Articles of Association Mr Lakey was characterised as a bad leaver. On 20 December 2019, a notice of Mr Lakey’s termination of appointment was filed at Companies House.
It later became apparent to Mitt that the formalities for the removal of Mr Lakey as a director had not been complied with. Mr Lakey’s directorship was accordingly restored until termination by shareholder resolution on 28 August 2020.
Termination of appointment
Generally, the appointment of a company director may be terminated:
By the director resigning
By ordinary resolution under section 168 of the Companies Act 2006 (“the Companies Act”). It is worth noting that the section 168 provisions can be overridden by an agreement between the shareholders to which the company is not a party
Where the Articles of Association (“the Articles”) contain provisions that specify when the appointment of a director is deemed to be terminated
By operation of law
Under contract, such as a provision in a service agreement requiring the director to resign
By court order
By the death of an individual director.
In this article, we focus on removal pursuant to the Companies Act and the importance of getting the procedure correct.
Removal under the Companies Act
To remove Mr Lakey, a resolution, pursuant to section 168 of the Companies Act was required. Such a resolution must be passed at a meeting: a written resolution will not suffice. Only an ordinary resolution i.e. a resolution passed by a simple majority, is required.
The procedure for such a removal is as follows:
Special notice of 28 clear days of the proposed ordinary resolution to remove a director is required to be given to the company. ‘Clear days’ means that the day the notice is given, and the day of the meeting, are not counted
The members must be given notice of such a resolution in the same manner and at the same time as notice of the meeting is given. Where this is impracticable, the company must give its members notice by newspaper advert (or as otherwise permitted by the articles) at least 14 clear days before the meeting
On receipt of a notice of an intended resolution to remove a director, the company must forthwith send a copy to the director concerned
The director is entitled to make written representations to the company in relation to their removal. If requested by the director, and provided there is sufficient time before the meeting, the fact of the representations should be included in the notice to members and the representations should be sent to the members. If there is not time to do so, or the company fails to do so, the representations should be read out at the meeting
However, copies of the representations need not be sent, and the representations need not be read out if, on the application either of the company or of any other person who claims to be aggrieved, the court is satisfied that the rights conferred by this section are being abused
The director is entitled to be heard at the meeting.
Issues with Mr Lakey’s removal
In this case, the court heard at trial that Mitt was advised that it was possible to terminate Mr Lakey’s directorship immediately in light of the findings of substantial breaches, “ideally” at a board meeting, relying on the Founders Service Agreement (the agreement between Mitt and Mr Lakey concerning Mr Lakey’s directorship). Mitt was advised that this course of action was not without risk, as it was non-compliant with the Companies Act and was in breach of the Articles and Shareholders Agreement. Mitt nevertheless went ahead with terminating Mr Lakey’s employment and his directorship, without complying with the formalities in the Companies Act.
Mr Lakey issued his unfair prejudice petition (“the Petition”) in June 2020. In the Petition, Mr Lakey alleged that his purported removal as a director had been unlawful. Mr Lakey was accordingly reinstated as a director. In July 2020, notice was given of a proposed ordinary resolution to remove Mr Lakey as a director. Mr Lakey made written representations on 6 August 2020, which were forward to Mitt’s members on 7 August 2020. In accordance with the procedure in s168 of the Companies Act, Mr Lakey was removed as a director by ordinary resolution at an extraordinary general meeting on 28 August 2020.
Consequences of removing a director
As Mitt discovered, whilst a company has a statutory right to remove a director, there can be consequences of doing so, particularly where the director is also a shareholder (as Mr Lakey was).
In his Petition (that Mr Lakey was entitled to bring as he had been a shareholder), Mr Lakey claimed that inter alia his removal as a director constituted unfairly prejudicial conduct. In his judgment, the Judge found no issue with Mr Lakey’s removal in August 2020.
As well as an unfair prejudice petition, a director who is a shareholder may also, if circumstances permit:
Make a derivative claim
Petition for the company’s winding up on the ‘just and equitable ground’ under section 122(1)(g) of the Insolvency Act 1986
Seek compensation or damages payable in respect of the termination of their appointment.
A director who is not a shareholder may also have claims against the company, for example for compensation or damages payable in respect of the termination of their appointment, or for liabilities due under their service contract.
If you decide to remove a director under section 168 of the Companies Act, it is accordingly essential that the procedural steps are followed. Consideration should also be given to other relevant documents, such as the Articles and any service agreements. Failing to follow the correct procedure can be disruptive and costly and advice should be sought at the earliest opportunity.
The Corporate team at Laytons ETL are experts in advising on the procedure for removing a director and the Disputes Team are on hand to deal with any fallout, utilising alternative dispute resolution where appropriate.
