Avoiding Unfair Prejudice in the Removal of a Director is vital. Cases of unfair prejudice are likely to have only one outcome for any business, a lasting and decidedly negative one.
If you are in the process of attempting to remove a director, no matter the reason, it is key that you know exactly what your rights are, what said director’s rights are, and what measures would be appropriate.
This blog will go into detail on potential methods of avoiding unfair prejudice in the removal of a director, including touching on the concept of unfair prejudice, discuss what can happen if there is an unfair prejudice claim and directors, how to remove a director from a company, and more.
What is Unfair Prejudice in Law?
Unfair prejudice occurs when a minority shareholder suspects that the majority shareholders within the company are acting unfairly. ‘Acting unfairly’, in this context, refers specifically to actions committed (or not committed) in order to both weaken, or prejudice the position of the minority shareholder, while strengthening the hand of the majority owners.
As stated in the Companies Act 2006, a member of a company may apply to the court by petition for an order under this Part on the grounds that:
- The company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
- An actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
In order for the unfair prejudice case to be legitimate, the party making the claim must be one of the affected minority shareholders.
For more information, take a look at our guide to unfair prejudice cases, going into more detail on the facts.
What Happens if There is an Unfair Prejudice Claim Against Directors?
An unfair prejudice claim against directors will often lead to the share price dropping and the reputation of the company suffering as a direct result of the increased negative publicity. Additionally, a court case is likely to follow, further increasing the negative impact to your business and your operation.
Typically, should there ever be an unfair prejudice claim against a company director, the most likely outcome is for the court to order the director in question to ‘buy out’ the shares of the shareholder they are deemed to have unfairly prejudiced.
Regardless of the outcome of the claim, the long-term impact that an unfair prejudice case can have should never be ignored or underestimated.
How to Remove a Director From a Company
When a director’s position in a company becomes untenable, there are a few options that can result in their departure. These include allowances in articles of association or shareholders’ agreements. Alternatively, a director can be removed via a statutory procedure as set out in sections 168 and 169 of the Companies Act 2006.
The most common methods of removing a director from a company are:
Ordinary Resolution
A director can traditionally be removed by passing an ordinary resolution at a company shareholders meeting. An ordinary resolution is passed via majority vote of company shareholders.
Anybody wishing to propose a resolution to remove a business’ director must give the company a formal notice of their intentions at least 28 days before a meeting is called. This is known as a ‘special notice’.
However, if a removal is seen to be in breach of the director’s contract or the terms of the company shareholders agreement, the deposed director could have a right to pursue damages in court.
An aspect of removing a director by ordinary resolution is that, as the name suggests, a majority shareholder automatically possesses the majority vote, meaning that they alone have the power to remove a director should they wish. This, if used incorrectly, can easily lead to cases of unfair prejudice and should be something to keep aware of.
Disqualification by Courts
Should the situation require it, the court has the power to remove a director and disqualify them from holding the position in that, or any other company, for up to 15 years.
In order for a director to be removed by the courts, they must be proven to be incompetent for the position. Possible reasons a director can be disqualified immediately includes if they:
- Declare bankruptcy
- Continue trading after insolvency
- Fail to maintain accounting standards
- Are under the minimum age requirement (16)
- Fail to file required documents with Companies House
- Neglect to pay their company corporation tax or other forms of taxation
While disqualification by courts is often less than ideal due to the potential costs and the time it takes, it is a good method of avoiding unfair prejudice in the removal of a director.
Articles of association
Another common and effective way of possibly avoiding unfair prejudice in the removal of a director is via the articles of association.
The articles of association are a series of written rules regarding the running of a company. These rules are agreed on by shareholders, directors, and the company secretary.
Generally, most companies will simply use the standard or ‘model articles’. However, some will opt to write the articles themselves in order to include provisions and set precedent for the future.
When setting out your firm’s articles of association, you are able to make arrangements for the removal of a director that, down the line, could save you from potential headaches.
Advice to Help Avoid Unfair Prejudice in the Removal of a Director
While there are options to remove a director, the most important thing is that you work out how to remove a director from a company in a manner that also protects the business.
Depending on the status of the director in question, it is possible that they may be within their rights to bring a claim for wrongful or unfair dismissal. A director who also holds a position as a shareholder removed using the statutory process could seek to apply to challenge the removal on the grounds of unfair prejudice.
The statutory process for removing a director can, if used properly, be a key tool in securing the future of your firm. However, it is also recommended that a legal professional be consulted prior to any action being taken. This is vital to ensure that the correct process is followed at all times, potential hazards are avoided, and your company remains protected.
One of the most secure methods of removing a company director, while avoiding any unfair prejudice threats down the line, is to plan ahead. Including provisions to how and when you are able to remove a director within your company articles of association or your shareholders agreements is an excellent way to future-proof your business from potential financial and reputational harm.
How Inquesta can Help you Avoid Unfair Prejudice
The lasting impact unfair prejudice cases can have on a business is often significant. The last thing you want when removing a director, no matter the reason, is for a long and drawn out legal process.
This is why it would be beneficial to get in touch with an expert before the situation is allowed to develop too much.
If you are seeking to minimise your chances of facing an unfair prejudice case in the future, or fear that one may be coming your way, contacting a legal professional can do wonders for your case.
Inquesta’s team of experts have been operating in the legal field for decades, assisting people with all manner of cases, from commercial disputes, forensic insolvency, financial crime, and much more.
There’s very little we haven’t seen before — this is why we can guarantee that our support is perfect to help steer you towards the best outcome possible. Get in touch with a member of our expert team today to get more information on what Inquesta can do to help you avoid unfair prejudice, or book a free consultation.