When people set up a business with their friends or family they often do not give much thought to what will happen if they fall out.
Often a company director can lose interest in a business project or get a better offer elsewhere. In a few cases they may perform badly or jeopardise the company through neglect, incompetence, or dodgy business practices. As with many business problems the easiest and cheapest way to resolve issues with a company director is through talking, either informally or with the help of a mediator. If this does not work then you may need to try and forcefully get rid of them. This is where things can get complicated.
The Rule Book
When you set up a limited company you create ‘articles of association’. This is effectively the rule book for the company. If you set up a company yourself at Companies House or use a standard formation package you will more than likely end up with the model articles or association. These are rules drawn up by Companies House to suit most companies. It is these rules which will determine how you can get rid of a director from your company.
Assuming that you do have the model articles then there are three basic issues you need to deal with.
The director is an employee of the company. This means they have the same kind of rights as any other employee to bring a case for unfair dismissal. You therefore need to tread very carefully and make sure you are following the correct procedures.
Of course as well as being an employee of the company your rogue director is also on the board. Getting rid of them here normally just requires a simple majority vote. Again you need to make sure that this is done correctly. You will need to inform all of the directors about the meeting, including the one you are trying to get rid of. You cannot try and prevent them from attending and they get to vote. They also have the right to lodge a formal protest.
If they are also a company shareholder, then things get even harder as you cannot normally force them to sell their shares. As a shareholder they can call board meetings, inspect the books and vote on an number of issues surrounding the company.
So the best thing to do is try and avoid getting in this kind of situation in the first place. Mainly this is about making sure that everyone understands the rules around how your company is set up. This will include
- The 2006 Companies Act, which outlines the duties of a company director to act in a way “most likely to promote the success of the company” they also have to “exercise reasonable care, skill and diligence”. There should be some understanding of what this means.
- Your articles of association – are you using the model ones or ones specially drafted for your company. What do they say about getting rid of directors and shareholders?
- How many directors and shareholders does your company have? Who can vote on what and how easy is it to get a majority vote?
- Director’s Service Contracts – make sure that you have these in place. They are basically employment contracts for the directors setting out what they responsibilities are, how much they earn etc.
If everyone involved in the company has a clear understanding of their roles and responsibilities from the start then, hopefully, you will be able to avoid problems down the line. If the worst does happen and you have to try and remove a director without their consent then you will likely need some professional help to avoid getting your business into even more trouble.
Of course one solution is that you simply leave them to it. Depending on the investment you have in the company it may be simplest to walk away and set up a new company without your problem director.