Shareholders in a limited company hold the position of its owners, as their ownership percentage depends on the number and value of their shareholdings. These shareholders appoint directors to ensure their company’s operational and financial tasks run seamlessly. With the Accountingfirms blog, you can figure out the straightforward and legal ways to know how to remove a director from a limited company in compliance with the Companies House and HMRC.
Moreover, the position of a director is highly responsible since they have multiple legal responsibilities to perform in a limited company.
To learn more about a limited company director and their duties, read our comprehensive guide: What is a company director and what are their responsibilities?
However, there might come a point where the shareholders may have to strip the director(s) of their rights and responsibilities owing to different scenarios.
It is crucial to know under what circumstances the removal of a director from a private limited company occurs and what is the proper and legal procedure to terminate a director.
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Consider the grounds for the removal of a director from a private limited company:
It is noteworthy that the director’s removal process does not happen out of the blue or unanticipated. Instead, there are several tangible and concrete grounds leading to their termination.
For instance, the following are the common reasons for removing a director:
- When the director commits a breach of statutory duties, such as their actions are antithetical to the company’s best interest.
- When the director is found guilty of misconduct or inappropriate behaviour.
- When they have been performing insufficiently and poorly for a long time, and the company is bearing the brunt of their inability to fulfil their role.
- When the director tenders a voluntary resignation.
It is important to highlight that although the removal of a director from a private limited company can happen for several reasons, the termination must be in compliance with the Companies Act 2006, the articles of association, the shareholders’ agreement (if the company has one), and any service agreements between the director and the company.
How to remove a director from a limited company?
The following are the different proper ways you should implement while figuring out how to remove a director from a limited company:
Remove a director in accordance with the company’s Articles of Association:
First and foremost, the prime document you need to review for the removal of a director from a private limited company is its Articles of Association. Simply consider these articles to be your company’s rule book.
The shareholders formulate these articles as per their preferences and business requirements. These articles outline how the company will be structured and governed. In addition, it most often includes clauses dictating how to end a director’s term of service in a limited company.
For instance, your company’s Articles of Association will lay out the occurrence of certain scenarios (the ones stated above), which will eventually result in the director’s dismissal.
Consequently, once these circumstances arise, no further action or resolution will be needed for the removal, nor can the other directors waive the event either.
What are model articles?
Moving ahead, if your limited company has no tailored Articles of Association, by default, it will rather have standard governing articles commonly referred to as model articles.
Notably, in line with article 18 of the model articles, a director’s position shall be revoked promptly if:
- They have presented their resignation;
- A majority of the company shareholders have cast a vote against them through an ordinary resolution;
- The court or law has disallowed them to be a director;
- They have become insolvent or similar;
- Their doctor has declared them to be physically or mentally incapacitated, and they have been like this for over a period of three months;
- Their service agreement has expired.
Moreover, In addition to the provisions of the Articles of Association, you must also consider the clauses of your company shareholders’ agreement and service agreement since these documents usually include in-depth terms regarding the removal of a director from a private limited company and the possible outcomes of such termination.
Lastly, you can visit the government website to thoroughly review the Model Articles, which refer to the responsibilities and decision-making powers process of directors in a limited company.
Dismissal by ordinary resolution of members:
In case the plausible reason for the director’s dismissal is not contained in your Articles of Association, as a member or a shareholder, you can end their office term by passing an ordinary resolution.
The shareholders choose the option of ordinary resolution when they are displeased with the director’s unsatisfactory performance. It is also called the statutory method for the removal of a director from a private limited company.
Notably, section 168 of the Companies Act 2006 deals with the ordinary resolution, which is called a resolution of the company shareholders. Further, it is passed by a majority vote (which is above 50%) of the eligible voters attending the shareholders’ meeting.
It is worth pointing out that even if the Articles of Association have no clause of ordinary resolution or the service agreement contains no such provision between the director and the company, the shareholders still retain the right to remove the director through the resolution.
How to remove a director from a limited company through ordinary resolution?
When the shareholders propose the expulsion of a director through the ordinary resolution, the board of directors of a limited company are required to send the shareholders the special notice.
This notice is meant to notify the concerned director of the proposed resolution to terminate them at a shareholder’s meeting, allowing them to attend and make representations.
Remember that the Special Notice must be sent to the director at least 28 days before the vote is cast at a general meeting.
Ultimately, if the majority vote goes in favour of the removal, it is mandatory to file Form TM01 with Companies House within 14 days after termination.
Removal of a director from a private limited company through the courts and the law:
If a company director fails to maintain their statutory obligations or their conduct is considered unfit, they can be disqualified by the Court, Companies House, HMRC, the Financial Conduct Authority, the Competition and Markets Authority, or a company insolvency practitioner.
Consequently, any company member can lodge an official complaint against them with the Insolvency Service.
Further elaborating, unfit conduct occurs:
- When a director continues to trade to the detriment of creditors despite the company having gone insolvent.
- When they fail to maintain accurate and up-to-date accounting records.
- When they fail to complete and file annual accounts with HMRC.
- When they fail to fulfil tax liabilities to HMRC and do not file company tax returns.
- When they maintain uncooperative behaviour with an insolvency practitioner or the Official Receiver.
Similarly, a director will have to relinquish their position if a provision of law or court prevents them from continuing their position.
To clarify, a court of law can issue several orders and directives, disallowing the individuals from being a director if the shareholders claim that the director has been running the company in a manner that is in stark contrast to the company’s and its members’ best interests.
Lastly, as per the law, a bankrupt person cannot assume the position of a limited company’s director since they remain subject to bankruptcy or a debt relief restrictions order.
What happens when the director resigns voluntarily?
Just like the shareholders can remove a director from a limited company, a director can also abandon their position within the terms of their contract by tendering their voluntary resignation.
As an alternative, you can also ask a director to put forth their voluntary resignation so that you won’t have to fulfil the termination proceedings. Whatever the case might be, you should inform the Companies House online or by post via Form TM01 within 14 days of the resignation.
Furthermore, you must also update the public register to indicate the change in your company. Similarly, updating the company’s statutory register of directors is also mandatory.
How to remove a director from a limited company if they are also an employee?
Primarily, even if the director is also an employee and has an effective service agreement with the company, they are still not immune or exempt from disqualification or removal. This is because the Companies Act 2006 procedure applies irrespective of any agreement between the company and the director.
On the contrary, there are certain scenarios in which a court may consider the director’s dismissal to be a deliberate one. As a result, it provides a significant opportunity for the former director to claim an unjust or wrongful termination against the company.
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Can a sole or co-director of a limited company be removed from office?
In the event where a limited company has either a sole director Both a sole director or a co-director, they can resign from their positions. Nevertheless, as per the law, it is mandatory for a private limited company to have at least one director who must be a natural person and not another firm.
To further explain, the company will take further action to terminate the only director. For instance, the company will have to appoint a new director before or simultaneously with the termination of the previous director.
Further, the Articles of Association usually include clauses for the appointment of a new director after the existing director’s office term concludes. More importantly, according to the model articles, a director can either be appointed through an ordinary resolution or by a decision made by the other directors if the company has any.
Last but not least, the model articles also deal with the event where the company is devoid of any shareholders and directors due to death. In this case, the personal representatives of the last shareholder to die retain the right to appoint a director.
If you intend to know more about limited company shares and its shareholders, you might find our following guides of immense help:
What are limited company shares? Things you must know about.
What are different types of shares in a limited company?
A comprehensive guide to limited company shareholders.
Conclusion:
In overview, the removal of a director from a private limited company is not an incident that occurs daily. On the contrary, a director is terminated only under tense and grave circumstances when the last resort is nothing but removal.
By carefully assessing the causes, you can understand the correct method of how to remove a director from a limited company, as stated above. Alternatively, by finding a certified accountant such as those listed at Accountingfirms, you can get a personalised consultation on the removal of your company director.
Not only that, but you can also discuss and seek expert advice on every business-related matter of your limited company, such as the company formation, filing corporation tax, VAT registration, best VAT scheme for your limited company, and many more. Thus, contact us today and make the financial and legal journey of your limited company complications-free.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.