Removal by shareholders is obviously not the only way in which a director may leave his position. The other ways in which he may cease to be a director are set out below.
Resignation by notice
A director could be put under pressure to resign either by the shareholders or by fellow board members and may simply take the decision to resign from the board by tendering a letter of resignation. This procedure is provided for in MA 18(f). A director may also decide to resign for personal reasons. It is usual, although not obligatory, in these circumstances for the board to pass a board resolution accepting the letter of resignation. If the resigning director is also a shareholder, consideration must be given as to what will happen to his shares i.e. will the other shareholders be able/willing to buy them?
Automatic termination
Under MA 18 a person ceases to be a director as soon as:
- the director becomes disqualified from being a director;
- the director becomes bankrupt;
- the director becomes the subject of an individual voluntary arrangement or enters into some other similar arrangement with his creditors; or
- a registered medical practitioner who is treating the director states in writing to the company that the director has become physically or mentally incapable of acting as a director and will remain so for more than three months.
Retirement by rotation
Public companies
The model articles for public companies require retirement and reappointment of directors by the members every three years.
Listed companies
In addition, listed companies are required under the Listing Rules to comply with the UK Corporate Governance Code (‘CGC’), or at least to explain in their annual accounts where and why they have not done so. One of the requirements of the CGC is that all directors should be subject to annual re-election.
Disqualification – Company Directors Disqualification Act 1986 (‘CDDA’)
The CDDA is the key piece of legislation regarding disqualification of directors. Under this Act, the court may make a disqualification order against a person preventing them, unless they obtain leave of the court, to be a director, liquidator, receiver or in any other way directly or indirectly involved in the promotion, formation or management of a company. The purpose of such an order is to protect the public against the activities of such a director. The period of disqualification is for a maximum of 15 years.
Grounds for disqualification
These include:
- conviction for indictable offences connected with the company’s promotion, formation, management, liquidation or striking off (s.2 CDDA);
- persistent breaches of company legislation (s.3 CDDA);
- fraud in a winding up (s.4 CDDA);
- unfit conduct of directors of insolvent companies (s.6 CDDA);
- fraudulent and wrongful trading;
- breach of competition law (s.9A CDDA); and
- conviction of certain offences overseas (s.5A CDDA – introduced by SBEEA 2015).
The most common reason for disqualification is the conduct of directors of insolvent companies which makes them unfit to be concerned in the management of a company (s.6 CDDA).
Unfit conduct of directors of insolvent companies
When a company goes into insolvency, the appointed insolvency practitioner (i.e. liquidator, administrator or administrative receiver) is required to submit a confidential report to the relevant Government department, dealing with the conduct of directors (and shadow directors) holding positions in the three years prior to the insolvency practitioner’s appointment. Save for competition infringements, only the Secretary of State or, in certain cases if the Secretary of State so directs, the Official Receiver, can make an application to court where the report indicates that a disqualification order should be sought. The application must be made within three years of the company becoming insolvent (this period was increased from two to three years by SBEEA 2015). The relevant Government department is currently the Department for Business, Energy and Industrial Strategy.
Where an application satisfies the court under s.6 CDDA that the conduct of a director of an insolvent company (which has gone into liquidation, administration or administrative receivership) makes him unfit to be concerned in the management of a company, the court is required to make a disqualification order against him. Matters to be considered by the court when determining the question of unfitness to be concerned in the management of a company are referred to in s.12C CDDA and Schedule 1 (they are nonexhaustive and are intended to be guidelines only).
Relevant matters include:
- misfeasance or breach of any fiduciary or other duty to the company;
- responsibility for the causes of the company becoming insolvent; and
- responsibility for any material breaches of legislation or other obligations by the company.
Undischarged bankrupts
It is a criminal offence for an undischarged bankrupt to take part directly or indirectly in the management of a company without leave of the court (ss.11 and 13 CDDA).
Consequences of failing to comply with a disqualification order
It is a criminal offence to act as a director or to participate directly or indirectly in corporate management without leave of the court (s.13 CDDA). The director is also personally liable for the company’s debts incurred while involved in the management of a company, in breach of a disqualification order (s.15 CDDA).
Disqualification undertakings
The Insolvency Act 2000 (‘IA 2000’) introduced s.1A to the CDDA with a view to improving the speed and efficiency of the disqualification process. Directors who are considered to be ‘unfit’ may consent to an appropriate period of disqualification from being a director or involved in the management of a company or acting as an insolvency practitioner, without the need for court proceedings. Disqualification can therefore occur administratively, where agreed, by such a director giving a ‘disqualification undertaking’ to the Secretary of State. The maximum and minimum periods are the same as under a disqualification order.
Human rights
The IA 2000 s.11 also amended s.219 of the IA 1986, whereby answers obtained from an individual under powers of compulsion in a company investigation (given in s.218(5) IA 1986) cannot generally be used against that person in subsequent criminal proceedings. This amendment resulted from the ECHR decision in the case of Saunders v UK 1996 23 EHRR 313, that such use of those answers infringed Article 6 of the First Protocol to the European Convention on Human Rights.
Disqualification for competition infringements – CDDA ss.9A-9E
The Enterprise Act 2002 amended the CDDA by allowing the Competition and Markets Authority (‘CMA) (which took over the functions of the Office of Fair Trading under this provision from 1 April 2014) to apply to the court for a competition disqualification order against any director of a company which has infringed either UK or EC competition law. The court will need to be satisfied that the director’s conduct in relation to that infringement, makes the director unfit to be concerned in the management of a company (s.9A CDDA). A maximum of fifteen years’ disqualification as well as possible disqualification undertakings apply.
Foreign disqualification
Under CA 2006 the Secretary of State is given power to make regulations to disqualify a director who has been disqualified under foreign laws. This power is intended to close a gap in the current law through which people who had been disqualified in other countries could still set up, and be directors of, UK companies.
The CDDA has also been amended by SBEEA 2015 to provide that in considering an application for disqualification of a director of an insolvent company, the court must have regard to conduct of that director in relation to overseas companies.