7. Directors - Termination & Company Liability PDF

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Termination & Company Liability...

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Termination of Directors

Resignation

Automatic disqualification under Table A articles in various circumstances

Director can resign at any time by providing written notice (MA18(F); Table A, art 81(d)).  board need only approve the notice - there is no requirement for board/shareholder resolutions  employment contract? company must take account of any notice periods or other procedures in order to avoid liability for breach of contract.

Mentally ill or bankrupt (TA81; also in MA18)  prohibited from becoming a director by law and in certain circumstances will automatically cease to hold office Absent without permission (TA81(e))  if absent without permission from meetings consecutively for 6 months and the other directors resolve to remove him, the director will lose office Termination of service contract? (Not covered by TA)  A director will not lose their position where their service contract is terminated (unless a special article provides that the director must resign if their employment contract is terminated)

Table A Retirement by Rotation at AGMs

Directors must retire by rotation?  Companies with TA? Yes (TA74 - but executive directors are exempt from the requirement to retire; TA84).  Public companies with MA? Yes  Private companies with MA? No AGM 1: (a) all directors retire (b) all directors are automatically reappointed  unless resolution to the contrary is passed by the shareholders Subsequent AGMs (a) 1/3rd of directors must retire (b) subject to re-election ***open to shareholders to remove director from board when his position as director is subject to confirmation in this way***.

Removal by board of directors

Removal by shareholders S168

There is no such power in the unamended MA or TA.  Power must be given to the board of directors in the Articles to dismiss fellow director by majority vote at board meeting.  Must act bona fide in best interests of company Shareholders have the right to remove a director from office at any time by passing an ordinary resolution at a general meeting only (A written resolution to shareholders cannot be used in this case S288(2)(a))  this right cannot be taken from them by anything contained in the director's service contract or by the articles (S168(1)). Notice Any shareholder wanting to remove a director must give the company special notice S168(2):  Must give at least 28 clear days notice (excludes day of meeting and day notice is given; S360)  Formal notice of intention to propose the resolution at the company's registered office (S312(1)). Directors rights Whenever company receives special notice under s168, it must ensure that: (a) copy of notice is sent to director concerned immediately under S169(1). (b) that director has the right:  to make written representations to the company; and  company must circulate them to the shareholders S169(3).  He may also speak at the general meeting, whether or not he is a shareholder S169(2).

Procedure for removing director from office ***Serve S168 (notification of termination of director) and S303 (compelling Ds to call a GM to approve it) at the same time*** Shareholders removing a director using S168 What date do the shareholders want the director removed by? In order to determine whether the director can be removed by that date consider the options below: 1.Cooperative board of directors (happy to see colleague face threat of removal by shareholders) Shareholder serves special notice as above BM1 (on reasonable notice)  pass a board resolution to call a general meeting S312(2)  only 14 days clear notice to the shareholders to call a general meeting is required. GM (after 14 days clear notice)  Shareholders pass ordinary resolution to remove director (only 50% needed to pass an ordinary resolution to remove the director) NB: where the GM is held within the 28-day notice period of the special notice, it will still be valid and must still be voted on (S312(4)). 2.

GM is already scheduled for other matters, special notice to remove a director is served afterwards, and the directors want to add it to the agenda for the already called GM.

If there are still 14 clear days notice until the GM  Directors can vote to add the resolution to the agenda  Give notice of the new resolution (in national newspaper or in any other manner as per articles; S312(3)).  Motion to remove director can be voted on at the GM

If there aren't 14 clear days notice until the GM  Shareholders cannot vote on removing the director  Another GM must be called, so use S303 to compel the directors to call another GM.

Compelling the directors to call a GM using S303 3.

Uncooperative board of directors (won't call GM in response to being served S168 notice):

Shareholders can force the directors to hold a GM where the shareholder serving the notice: (a) owns at least 5% of the voting shares in the company; and (b) served the notice in the form prescribed by S303 1. 2. 3. 4.

Shareholder serves S168 and S303 notices at the same time Directors then have 21 days to call a GM (S304(1)(a)). If the directors agree to call a GM, it must be held on a date not more than 28 days after the date of the notice calling the GM (S304(1)(b) ) If the directors refuse to call a GM, the shareholders can call a GM themselves under S305  14 days notice is normal, but can be within 3 months) S305(4)

If the directors refuse to call a GM:  S303 notice - 1 January Wait for 21 days to expire - 22 January Wait 2 days for deemed service - 24 January  If directors have not called GM, shareholders send out notice to call GM - January 25 Wait 14 clear day notice period  Earliest date for GM (notice by hand - 9th February) Add 2 days for deemed service (if notice was sent by post)  Earliest date for GM (notice by post - 12 February) If the directors agree to call a GM, but want to do their absolute worst:  S303 notice - 1 January Directors call GM on day 21 - 22 January Wait 2 days for deemed service - 24 January  Shareholders receive notice to call GM - January 25 Ds can wait up to 28 days to hold GM  Latest date for GM (notice by hand - 22 March) Add 2 days for deemed service (if notice was sent by post)  Latest date for GM (notice by post - 24 March) ***The GM is then held and the ordinary resolution voted on (50% majority needed)*** Administration ***If removed, the director automatically loses any executive role within company*** The directors must: (a) notify Registrar of Companies within 14 days on TM01 (b) delete the director's name from the register of directors (c) delete the director's name from the register of residential addresses (see above). (d) keep record of director's service contract at registered office/SAIL for one year after termination (S228) (e) keep record of any minutes of BMs/GMs held to remove the director

Potential liability of the company  

The director loses his executive role, but his service contract is still binding on both parties and he retains any employment rights he may have. The company has prima facie breached the employment contract by preventing the director from doing his job by removing his executive role and may therefore be liable to the following potential claims from the director:

1. 2. 3. 4.

Constructive dismissal Wrongful dismissal Unfair dismissal Redundancy

Note also the possibility of: 5. Compromise Agreement 6. Compensation for Loss of Office Constructive Dismissal - breach of contract claim Where the employer has committed a repudiatory breach of contract, the employee is entitled to:  treat the contract as discharged  leave with or without notice  bring a claim of wrongful dismissal as he has been "constructively" dismissed. (humiliation in front of clients/colleagues; unreasonable work demands; unilateral alteration of contract terms, etc). Does the employer have a defence? If the employee committed a repudiatory breach of an express/implied term of the contract beforehand, the employer can use this as a defence (even if he didn't know about it at the time the directorship was terminated, and only discovered it afterwards) (selling trade secrets; disobeying orders; serious misconduct, etc)

Wrongful Dismissal - breach of contract claim (term breached is notice period) Where the employee has been wrongfully dismissed, they will have a common law claim which they can bring to: (a) County Court (b) High Court (c) Employment Tribunal (damages capped at £25,000). 1.

What must the employee show?

The employee must show that the dismissal was in breach of contract: (a) Fixed-term contract ended before the expiry date (b) Indefinite contract ended with: (i) no notice (ii) inadequate notice 2. What is adequate notice? Notice period in Notice period contained in employment contract must be complied with. employment contract If it is less than the statutory minimum, then the statutory minimum prevails S86 ERA). No notice period in employment Employee is entitled to the statutory minimum notice period. contract What is the statutory notice period? Employed for a continuous period of 1 month 2 years 3 years... ....12 years 30 years

Statutory minimum notice 1 week 2 weeks 3 weeks (+ 1 week per year worked) 12 weeks (maximum) Still only 12 weeks

3.

Does the employer have a defence? If the employee committed a repudiatory breach of an express/implied term of the contract beforehand, the employer can use this as a defence (even if he didn't know about it at the time the directorship was terminated, and only discovered it afterwards)

4.

Has the employee mitigated his loss? The employee is under a duty to take reasonable steps to mitigate his loss (e.g. find a new job)

5.

Damages Damages are assessed under ordinary contractual principles (i.e. the purpose is to put the employee in the position he would have been had the contract not been breached). Calculation: Net salary of employee (i) for the period of the remainder of the contract (fixed contracts) (ii) for the period of the proper notice period (indefinite contracts) PLUS other benefits, e.g. company car or pension rights

LESS any payment in lieu of notice EQUALS damages NB: No award for loss of future prospects or injury to feelings.

Unfair Dismissal

Where a qualifying employee has been dismissed unfairly, S94 ERA 1996 permits them to be reinstated or receive compensation. 1.

The employee must bring a claim to an Employment Tribunal within 3 months of dismissal

2.

The employee must prove: (a) they were dismissed (b) they are a "qualifying employee": (i) employment contract beginning on and after 6 April 2012  2 years continuous employment (immediately prior to the dismissal) (ii) employment contract beginning before 6 April 2012  1 years continuous employment (immediately prior to the dismissal)

3.

The burden of proof then shifts to the employer, who must demonstrate: (a) the principal reason for dismissal was one of the 5 permitted reasons: (i) capability of qualifications - not competent to carry out the work required of him (ii) gross and persistent misconduct - improper during working environment and hours (outside is only relevant if it has a direct bearing on their fitness to do the job) (iii) breach of legislation - the employee could not continue without breaking some law (e.g. taxi driver losing taxi license) (iv) redundancy - the employee will be entitled to redundancy payment, as outlined below. (v) some other substantial reason (e.g. personality clash between worker) (b) they acted reasonably  genuine and reasonable belief?  belief based on reasonable investigation and procedure?  size of the business?  any procedural defects, such as: o Warning? o Given chance to improve? o Offered supervision & extra training? o Redeployed to another area suited to employee's competence?

4.

The tribunal will then decide whether or not the dismissal was unfair.

5.

If the dismissal was unfair, the following remedies are available: (a) Reinstatement & re-engagement - getting old/similar job back with same/associated employer (b) Compensation (i) basic award (ii) compensatory award (see below)

Redundancy - statutory claim under Employment Rights Act 1996, S139.

The employer is liable to pay redundancy pay to qualifying employees. If they do not, or a dispute arises regarding the amount of redundancy, the employee can make a claim to an Employment Tribunal within 6 months. 1.

The employee must prove: (a) they were dismissed (b) they are a "qualifying employee": (i) employment contract beginning on and after 6 April 2012  2 years continuous employment (immediately prior to the dismissal) (ii) employment contract beginning before 6 April 2012  1 years continuous employment (immediately prior to the dismissal)

2.

Does the reason for dismissal fall within the statutory definition of redundancy? S139 ERA 1996 (a) Complete closedown (whole business ceases) (b) Partial closedown (place/job where employee was employed ceases) (c) Over manning/change in type of work (work where employee was employed has ceased/diminished, or is expected to) If the reason for dismissal falls within one of the above reasons, the employee is prima facie entitled to redundancy payment.

3.

Did the employee unreasonably refuse an offer of suitable alternative employment?  if so, look at wrongful dismissal and unfair dismissal instead.

4.

Redundancy payment  Calculated as for the basic award (see below) Basic and Compensatory Awards Basic Award Formula A x B x C = basic award  A = employee's final gross week's pay (subject to max of £450)  B = years of service (up to max of 20 years)  C = multiplied related to employee's age while in service Going backwards from the end of employment: Years worked when Multiplier aged below 22 0.5 aged below 41 but not 1 below 22 aged not below 41 1.5 SC worked from aged 30 and made redundant on 50th birthday on a salary of £450 per week:  11 years x 450 x 1 = £4,950  9 years x 450 x 1.5 = £6,075  £11,025 redundancy payment

Compensatory Award In addition to the basic award, the tribunal will also award a compensatory amount they feel is just and equitable  immediate loss of net wages (from date of dismissal to date of hearing)  future loss of net wages (based on estimate of how long it takes until employee gets another job)  loss of fringe benefits  loss of statutory protection (accumulated rights over long service, e.g. right to redundancy payment) Deductions (a) Employee mainly at fault for an unreasonable failure to follow ACAS Code of Practice? - reduction up to 25% (b) Any ex gratia payment (c) Any payment in lieu of notice Increases (d) Employer mainly at fault for an unreasonable failure to follow ACAS Code of Practice? - increase up to 25% NB: the amount is subject to a cap of £74,200 (after deductions and not including fringe benefits).

Overlapping claims: The principle is that an employee cannot recover twice for the same loss, so awards from multiple claims are offset against each other (e.g. if a redundancy payment is larger than the basic award for unfair dismissal, it will be offset against the basic award and the remainder will then be offset against the compensatory award).

Compromise Agreement between employer and employee A compromise agreement is an agreement between the company and the director and it is used to get rid of an unwanted director quickly while protecting the company from the claims discussed above. The director will typically receive a payment for loss of office in full and final settlement of any particular claim which he might have against the company. To be binding, it must: (a) be in writing (b) identify adviser, related to the particular complaint and state that the relevant statutory conditions are satisfied (c) employee must have received independent advice on his rights before a tribunal and on the effect of the agreement (d) the adviser must be covered by professional insurance or an indemnity (e) it must relate only to matters in dispute and no wider (e.g. it cannot exclude "all possible claims"

Compensation for loss of office (S215) Payment from company to terminated director must be approved by ordinary resolution by the shareholders either at a general meeting or by written resolution (S217(1)). [If the company is a subsidiary of a holding company, and the director in question is also a director of the holding company, then an ordinary resolution from both companies is required.] What is required when calling GM/WR? A memorandum setting out the terms of payment must either: (a) for a written resolution, be sent out to all eligible members with the written resolution for approval (b) for a GM, made available to all shareholders: (i) at the registered office for not less than 15 days ending with the date of the GM; and (ii) at the meeting itself

When is approval not required? 1. Minor payments (including other relevant payments) which don't exceed £200 (S221(3)) 2. The payment is made in good faith under S220(1), and the payment is: (a) in discharge of an existing legal obligation (i.e. not entered into in connection with or as a consequence of the event giving rise to payment for loss of office) (b) by way of damages for breach of such an obligation (c) by way of settlement or compromise of any claim arising in connection with the termination of a person's office or employment (d) by way of pension in respect of past services 3. No approval is required under S217 where the body corporate is: (a) not a UK registered company; or (b) is a wholly-owned subsidiary of another body corporate (S217(4)) What if payment is made without obtaining the approval of the shareholders? If the directors are in breach of S217, then under S222(1) it is held that: (a) the recipient holds the payment on trust for the company; and (b) any directors who authorised the payment are jointly and severally liable to indemnity the company for any loss resulting from it ***NB: The rules relating to SPTs are not applicable to anything D is entitled to under his employment contract and/or any payment arising out of loss of office***

How can a director protect themselves from dismissal? 1. Check the articles (a) Can he count in the quorum? can he vote? if he is also a shareholder, can he vote? (b) Bushel v Faith clause:  Directors who are also shareholders are sometimes given weighted voting rights on resolution for their removal (e.g. the shareholder being dismissed as director may have 10x the amount of votes when compared with other shareholders, which may prevent his termination).  Shareholders wishing to remove such a clause need to pass special resolution under s21 at a general meeting... check if director has also been given weighted votes for this too. 2. Use S169 rights  As noted in 'termination of directors', the director is entitled under S169 to: (i) to make written representations to the company; and (ii) company must circulate them to the shareholders S169(3). (iii) He may also speak at the general meeting, whether or not he is a shareholder S169(2).

3. Unfair prejudice action under S994(1)? 4. Shareholders agreement?  if the director is also a shareholder, there may be an agreement between the shareholders to agree not to vote against specified directors on a motion to dismiss Other possibilities: 5. Fixed term service contract  for long duration without a break clause - financial disincentive to dismiss as the director will be paid significant compensation on dismissal

6. Make a loan to the company  make a loan to the company which is outstanding, and make the loan repayable in the event that the director loses his position on the board.  financial disincentive to dismiss....