Company Law - Directors I (Part 3)

Statutory power of removal – s.303 Companies Act 1985 s.168 Companies Act 2006

s.168: “A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.”

The procedure is that any member who wishes to propose a resolution to remove a director must give the company “special notice” by leaving notice at the registered office at least 28 days before the general meeting. The director whose removal is proposed has the right to make written representations to the members and he can also speak at the meeting, whether or not he is a member.

It should be noted that this power cannot be varied or abrogated by the articles or any other agreement. Therefore, members will always have the right to call a meeting to remove a director, and providing they pass an ordinary resolution in support, will be entitled to remove that director.

However, as mentioned in Session 2, it is possible to avoid the effects of s.303 Companies Act 1985/s.168 Companies Act 2006. The articles cannot include a provision entitling the member to be director because:

(a) this would be an ‘outsider’ right and therefore unenforceable under Hickman; and

(b) would also be void for abrogating the members’ right of removal under s.303 Companies Act 1985/s.169 Companies Act 2006.

Despite this, it is possible to give the member weighted voting. Essentially, this is a clause in the articles which provides that, in the event of an s.303/s.168 resolution, that member would have (for example) 3 votes per share. This figure will be calculated so as to prevent the other members from passing an ordinary resolution (although obviously this will only work where the director holds shares entitling him or her to vote at the meeting). The reason this works is because:

(a) the right to vote is an ‘insider’ right and therefore passes the Hickman filter; and

(b) it does not prevent the other members from exercising their rights under s.303/s.168. They can still call the meeting, and they can still remove the director if they pass the resolution. The clause simply prevents them from having enough votes to pass the resolution.

On a practical basis, where the director has a service contract it is possible that his removal may amount to a breach of his contract with the company. It could therefore be very expensive for the company to get rid of him, particularly where the director has a long fixed-term contract.

Power of removal in the articles

The articles will normally contain conditions upon which a director will normally vacate office or upon which they may be removed. For example, art.81 Table A requires that a director automatically vacate office if, inter alia, he becomes bankrupt, suffers from a mental disorder or is absent without permission for more than 6 months.

Directors’ common law duty of care and skill 
A major element of a director’s duty is the common law duty of care and skill. The traditional approach can be found in:

Re City Equitable Fire Insurance Co

A director:

- need not exhibit a greater skill than may be expected from a person with knowledge and experience akin to that of the director;

- is not bound to give continuous attention to the affairs of the company;

- is justified in trusting a delegate to perform the duties in an honest manner unless there are suspicious circumstances.

This subjective standard was pitched at a rather low level, and over time there has been a marked shift towards greater accountability:

Presently, it is more akin to the standard set down in s.214 Insolvency Act 1986 (wrongful trading). Essentially, any greater degree of skill than could be expected from a reasonable, diligent person imputed with the skill and experience that may be reasonably be expected of the holder of the position in question.

Re Barings (No 5)

“Directors have, both collectively and individually, a continuing duty to acquire and maintain sufficient knowledge and understanding of the company’s business to enable them to properly discharge their duties as directors”.

See also Re D’Jan of London.
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