Removing a Director for Misconduct: Legal Options, Risks and Practical Steps
Suspected misconduct by a director can put a company in a difficult position. The business may need to act quickly to protect its confidential information, funds, customers or reputation, while at the same time ensuring that any action taken against the director is legally valid.
Examples can range from conflicts of interest and misuse of company information to serious management failures, unauthorised payments or running a competing business. In more serious cases, there may be allegations of fraud, theft or deliberate misuse of company assets.
However serious the allegations may be, misconduct does not automatically remove someone from office as a director. The company must still consider its articles of association, any shareholders’ agreement and the statutory procedure for removing a director.
It is also important to look at the wider position. A director may also be a shareholder and an employee. Removing them from the board does not, by itself, remove their shares or terminate their employment.
Can a Director Be Removed for Misconduct?
A director accused of misconduct can potentially be removed from office in a number of ways.
Depending on the circumstances, this may include:
- the director agreeing to resign;
- the director ceasing to hold office under a provision in the company’s articles of association;
- the shareholders removing the director by ordinary resolution under section 168 of the Companies Act 2006 (“Companies Act”); or
- an agreed departure forming part of a wider settlement between the parties.
The appropriate route will depend on the company’s constitutional documents, the voting position and whether the director is also a shareholder or employee.
Importantly, there is no general rule that an allegation of misconduct immediately ends a directorship. Even where the evidence appears strong, the company should make sure that it uses a legally valid process.
What Can Amount to Director Misconduct?
There is no single definition covering every situation. The nature and seriousness of alleged misconduct will depend on the facts.
Examples may include:
- using company money or assets for an improper purpose;
- making unauthorised payments;
- diverting customers or business opportunities away from the company;
- setting up or becoming involved in a competing business;
- misusing confidential information or intellectual property;
- failing to disclose a conflict of interest;
- accepting an improper personal benefit;
- serious or repeated failures in the management of the company;
- acting outside the powers given to the director;
- dishonesty towards the company, fellow directors or shareholders; or
- breaching contractual obligations owed to the company.
Directors also owe statutory duties to the company under the Companies Act. These include duties to act within their powers, promote the success of the company, exercise independent judgement, exercise reasonable care, skill and diligence and avoid conflicts of interest.
A suspected breach of those duties can raise issues going beyond whether the individual should remain on the board. The company may also need to consider whether it has suffered a financial loss or has a legal claim against the director.
What Should the Company Do When Misconduct Is Suspected?
It can be tempting to remove the director’s access and demand their resignation immediately. Sometimes urgent action is justified, particularly if company money, data or business relationships are genuinely at risk.
However, acting without first establishing the legal position can create additional problems.
Preserve the Evidence
The company should consider what documents and information may be relevant and take lawful steps to preserve them.
Depending on the allegations, this could include:
- emails and correspondence;
- accounting and banking records;
- contracts and invoices;
- board papers and minutes;
- expense records;
- access logs;
- customer or supplier communications; and
- documents showing how particular transactions were authorised.
Care should be taken not to destroy, alter or improperly access evidence. In a serious dispute, obtaining legal advice at an early stage can also help the company manage issues of confidentiality and legal privilege.
Review the Company’s Constitutional Documents
The articles of association and any shareholders’ agreement should be reviewed before action is taken.
They may contain provisions dealing with, among other things, appointment and removal of directors, board voting and dispute or exit mechanisms.
These provisions can materially affect the company’s options.
Consider Immediate Protection of the Business
Where there is a genuine risk to company assets or information, practical safeguards may also need to be considered.
Depending on the circumstances and the company’s legal rights, these could include reviewing:
- banking and payment authorities;
- delegated signing powers;
- access to company systems and data;
- access to confidential information;
- company credit cards;
- company devices and property; and
- authority to communicate with customers, suppliers or employees on behalf of the company.
Care is needed where the director is also an employee. Suspending someone from employment or restricting their workplace access can raise separate employment-law and contractual issues.
Removing the Director Under the Companies Act
If the director will not resign voluntarily, shareholders may be able to use section 168 of the Companies Act.
Section 168 allows a company to remove a director by ordinary resolution at a shareholders’ meeting.
In broad terms, the procedure involves:
- checking the articles, shareholders’ agreement and voting rights;
- giving the required special notice of the proposed resolution;
- sending the relevant notice to the director;
- allowing the director to exercise their statutory rights to make representations and be heard;
- holding a general meeting and putting the ordinary resolution to a vote; and
- if the resolution is passed, dealing with the necessary Companies House notification and company records.
The special notice requirements are important. Generally, notice of the intention to move the resolution must be given to the company at least 28 days before the meeting.
A section 168 resolution also cannot be passed using the private company written-resolution procedure.
Procedural mistakes can be particularly problematic where the director already disputes the allegations. The voting position should therefore be established before the process begins.
Our guide on how to remove a director from a limited company explains the section 168 procedure and its notice requirements in greater detail.
What if the Director Is Also a Shareholder?
Removing someone as a director does not automatically remove their shares.
This distinction is especially important in owner-managed companies, where the directors and shareholders are often the same people.
A director who has been removed from the board may still have important shareholder rights, including voting and dividend rights. Depending on the size and nature of their shareholding, simply removing them as a director may therefore leave the underlying dispute unresolved.
The articles and shareholders’ agreement should be checked for compulsory transfer or leaver provisions. If none apply, a separate agreement may need to be negotiated regarding their shares.
Where the individual remains a shareholder, the company and the other shareholders should also consider the risk of a wider shareholder dispute. In some circumstances, an excluded shareholder may allege that the company’s affairs have been conducted in a manner which is unfairly prejudicial to their interests.
This is one reason why it is important to consider the overall strategy before treating formal director removal as the complete solution.
What if the Director Is Also an Employee?
A director may separately have an employment contract or director’s service agreement.
Removal from the board does not automatically terminate that employment.
The company may therefore need to consider a separate disciplinary or dismissal process, depending on the allegations and the individual’s employment status and rights.
Relevant matters can include:
- whether the alleged conduct amounts to misconduct or gross misconduct under the employment contract or policies;
- whether an investigation is required;
- suspension and whether it is appropriate;
- disciplinary procedures;
- contractual and statutory notice;
- accrued salary, holiday, bonuses and benefits;
- potential unfair dismissal or wrongful dismissal claims; and
- post-termination restrictions.
Where an agreed departure is being negotiated, an employment settlement agreement may also form part of the overall package.
Can the Company Bring a Claim Against the Director?
Removal from office deals with whether the person remains a director. It does not determine whether the company has claims arising from what happened before their removal; therefore, the company could potentially bring a claim against a director depending on the specific circumstances.
Where the director may have breached duties owed to the company, potential remedies will depend on the circumstances and could include claims relating to financial loss, recovery of company property or money, or profits improperly obtained by the director.
The company should establish:
- what duty or contractual obligation may have been breached;
- what evidence supports the allegation;
- whether the company has suffered a loss;
- whether the director has obtained a personal benefit;
- whether any transaction can or should be challenged; and
- whether litigation is commercially proportionate.
In certain circumstances, a shareholder may also seek permission to pursue a derivative claim on behalf of the company in relation to an alleged default, negligence, breach of duty or breach of trust by a director.
This is a specialist area and should not be confused with the company itself bringing a claim.
What if Urgent Action Is Needed?
Some director disputes require more than an ordinary removal process.
For example, there may be evidence that a director is:
- moving company money;
- transferring assets;
- diverting customers;
- taking confidential information;
- destroying evidence; or
- taking steps likely to cause serious and immediate damage to the business.
In an appropriate case, urgent court remedies may need to be considered alongside the corporate removal process. This can include seeking an injunction and, in particularly serious cases where the legal requirements are satisfied, considering whether more extensive protective relief is available.
These remedies are fact-specific and can carry significant cost and risk. Legal advice should therefore be obtained urgently before an application is made.
Where the allegations concern fraud, theft or deliberate misuse of company funds, there may also be additional civil and potentially criminal considerations.
Should You Negotiate Rather Than Remove the Director?
Not every misconduct dispute needs to result in a contested removal.
Even where the relationship has broken down, there can be commercial advantages in negotiating an orderly departure.
A negotiated settlement can potentially address the director’s:
- resignation from the board;
- shareholding;
- employment;
- director’s loan account;
- company property;
- access to confidential information;
- restrictive covenants;
- handover obligations; and
- potential claims between the parties.
This may offer greater certainty than removing the director from office while leaving the remaining issues unresolved.
However, negotiation may not be suitable where the company needs immediate protective action or where the alleged conduct is too serious to leave unaddressed.
Common Mistakes When Removing a Director for Misconduct
Assuming Misconduct Automatically Removes the Director
It does not. The appropriate constitutional, contractual or statutory process still needs to be followed.
Failing to Secure Evidence
Acting before relevant information has been preserved can make it significantly harder to investigate the allegations or pursue a later claim.
Making Allegations More Widely Than Necessary
Accusations of dishonesty, theft or fraud are serious. Companies should be careful about how allegations are recorded and communicated, particularly before the facts have been properly investigated.
Ignoring the Director’s Shares
Removing a director who remains a substantial shareholder may change the board position without resolving the underlying dispute.
Overlooking Employment Rights
A director who is also an employee may have separate statutory and contractual protections.
Failing to Check Voting Rights
Before commencing a section 168 process, the company should establish whether the shareholders actually have sufficient voting power to pass the proposed resolution.
Treating Removal as the End of the Matter
There may still be issues concerning claims, confidential information, company property, restrictive covenants, loans, guarantees and shares.
Frequently Asked Questions: Removing a Director for Misconduct
Not simply because conduct is described as “gross misconduct”. That term is particularly relevant to employment law. The company still needs a valid legal basis for the director to cease holding office. If the individual is also an employee, the employment position should be considered separately. Section 168 provides a statutory mechanism for shareholders to remove a director by ordinary resolution. It does not require the shareholders first to obtain a court finding that misconduct occurred. However, allegations should not be made carelessly, and separate employment, contractual or shareholder issues may require evidence of what actually happened. Not necessarily. The company’s articles must be checked. The standard Model Articles do not provide a general power for a majority of directors simply to dismiss another director from office. If the director is also a shareholder, their rights as a shareholder must be considered separately. Their voting entitlement will depend on the shares they hold and the company’s constitutional arrangements. No. Directorship and share ownership are legally separate. A refusal to resign does not necessarily prevent shareholders from using the section 168 procedure, provided the statutory requirements are satisfied and there is sufficient voting support. Potentially. Removal from office does not prevent a company from considering separate claims arising from alleged breaches of duty, misuse of company assets or other wrongdoing. Whether a claim is available and commercially worthwhile will depend on the evidence, loss and surrounding circumstances. This depends on the director’s legal and contractual position and what powers the company has. If the director is also an employee, suspension raises additional employment-law considerations. The company should obtain advice before taking action where the position is contentious.
How We Can Help
At The Jonathan Lea Network, we advise companies, shareholders and directors on difficult director departures and disputes, including cases involving suspected misconduct and alleged breaches of directors’ duties.
We can help you:
- review the articles of association and shareholders’ agreement;
- establish the available removal options and voting position;
- advise on the section 168 procedure and prepare the necessary notices and resolutions;
- assess allegations of misconduct and potential claims;
- advise on protecting company assets, information and business relationships;
- deal with the position where the director is also a shareholder or employee;
- negotiate an agreed shareholder-director exit; and
- work with you on contentious proceedings where a negotiated solution cannot be reached.
Director misconduct disputes can escalate quickly, particularly where substantial shareholdings, valuable intellectual property, customer relationships or significant company funds are involved. Taking advice before positions become entrenched can help preserve the company’s options and reduce the risk of the removal process generating a second dispute.
We provide most enquiries with an indicative scope of work and fee estimate, based on the information you share. We aim to respond within one working day.
In the same email, you will be invited to arrange a 20-minute complimentary, no-obligation video consultation, should the proposed scope of work and fee estimate be of interest. This initial discussion is designed to help us better understand your requirements, refine the scope of work and ensure our approach is fully aligned with your objectives.Following the call, we will email you a definitive, formal fee estimate for you to consider and approve.
Where you would prefer to receive initial advice and guidance from the outset, or where a short introductory call would not be the most appropriate starting point, we may instead recommend a 2.5-hour fixed-fee appointment, starting from £750 + VAT. This enables us to review the information you provide, discuss your situation with you and provide considered, tailored advice at an early stage.
To make an enquiry, please email us at wewillhelp@jonathanlea.net, complete our contact form, or call us on 01444 708640.
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This article is a general overview and is not legal or tax advice. The options available will depend on the LLP agreement and the particular facts of the matter.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.