How do I get rid of a director using litigation?

Getting rid of a director is an option open to companies and the reasons for doing so can be numerous; whether there is a divergence on strategy or management or the director is deemed to be underperforming. Companies also often reach this point when a director is not complying with their duties.

When considering removing a director of a company it is important to check that all routes have been covered before resorting to litigation. It is worth noting that litigation is usually a last resort in terms of getting rid of a director and is only worth considering if the other, more common methods, have been exhausted and/or are not available.

The first place to look is the company’s articles of association and any other constitutional documents. These documents frequently have provisions on what should be done to remove a director and therefore it is important to check these before taking any other action. It goes without saying that well drafted articles of association will avoid ambiguity when the relationship with a director has run its course.

If no articles exist or the ones that do, do not contain provisions for the removal of a director, members of the company can then make use of the statutory procedure under the Companies Act 2006. The procedure for removing a director by ordinary resolution is set out in sections 168 and 169. An ordinary resolution (over 50%) can be passed at a meeting of the company. A formal notice must be served on the company at its registered office, by at least 28 clear days before a general meeting and a copy is to be sent by the board to the director to be removed. The director can make representations to the company regarding the resolution for removal and the decision will be put to vote.

As before, these are the most common methods of getting rid of a director and should always be considered before undertaking litigation but there are other situations where a director may be removed as a result of a court order.

An application for unfair prejudice under section 994 of the Companies Act 2006 can be made on the grounds that the company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of members, or that an act or omission of the company is unfairly prejudicial. The court has a wide discretion to make such order as it sees fit to remedy any unfair prejudice the petitioner can establish and therefore could potentially order the removal of a director. However, as has been seen, the courts are often reluctant to exercise their power in this way.

A director may also owe contractual duties to the company if there is a director’s service agreement, employment contract or letter of appointment in place or there may be malus or clawback clauses (and potentially under any shareholders’ agreements or personal guarantees). These should be checked to see what terms have been agreed regarding the termination of a director. There may be provisions in these that mean the director will removed if they breach the terms of the relevant contract. There is a real risk of an unfair dismissal claim being pursued where a director is also an employee so care must be taken throughout the process. A common remedy in breach of contract claims are damages however other remedies may be appropriate including recession or cancelling the contract, for example if the director has breached certain fiduciary duties or has made fraudulent or negligent misrepresentations.