Removal of a Director of a Private Limited Company - Part 2 of 4
Part 2 of this series will discuss the potential for statutory claims as a result of contractual terms entered into by directors and the potential threat of an unfair prejudice claim. We strongly recommend that, if you are considering the removal of a director, you consider each part of this series as the themes of the parts are linked.
One of the first considerations in this regard is to consider what contractual claims a director may have against the company. These potential liabilities can arise as a result of the various roles which a director may have in addition to his responsibility to the board. For example, is the director also a shareholder and is there a shareholders' agreement in place? If so, there may be potential for a director to make a contractual claim under that agreement against the other shareholders. Additionally, if the director's appointment is terminated at the same time as their service agreement or contract of employment, he may have a contractual claim for wrongful dismissal or statutory claims including unfair dismissal and discrimination. These separate roles as shareholder and employee will be discussed later in this series, however, it is important to raise this consideration now in our discussion as it is important when removing a director, that each co-director takes time to consider the various roles of any director and his own duties to the company. These separate roles can result in separate liability that has the potential to be harmful to the company and its reputation. For this reason, the company must be confident that the board has identified all of the potential roles a director may have and that, having considered this, the removal of any director is in the best interests of the company and not for any ulterior motive.
The motives behind removal of a director are particularly important with the potential threat of an unfair prejudice action being brought. Under section 994 of the Companies Act 2006 ("the Act"), a shareholder can petition the court on the grounds that the company is conducting its affairs in a manner which is unfairly prejudicial to its shareholders or at least part of them. The question of what amounts to unfair prejudice has been debated by the court for many years and has been widely interpreted to apply in a variety of scenarios.
What is key to analysing such scenarios is to establish, almost as separate exercises, that the conduct has been both "unfair" and "prejudicial." This is important because, for example, courts have rejected claims where something has been allegedly prejudicial but, ultimately, it has not been "unfair" because there has still been evident corporate benefit.
One of the main areas where unfair prejudice claims have been frequently applied is where a director has been removed from a company which the court considers is actually a "quasi-partnership." A quasi-partnership is a company where on incorporation it was intended to be operated as a partnership between the shareholders. Because of this initial intention, it is considered reasonable by the court for each shareholder to assume and expect that they would remain involved in the management of the company throughout its lifetime. By removing a director who has been a shareholder since the incorporation of the company and expected to be involved in the full life cycle of the company, they may have a claim that they have been unfairly prejudiced and should not have been removed.
Taking the example of the court's consideration of a quasi-partnership in the context of an unfair prejudice claim, we can see that the courts have given a wide definition of what could be considered to be unfairly prejudicial with minimal considerations required. This application could be easily applied to a variety of company structures and result in a successful claim for unfair prejudice.
For the reasons discussed in this series, it is crucial that companies seek independent legal advice in dealing with the removal of a director so that the potential for these types of claims to arise can be minimised as much as possible.
If you have any questions in relation to the topic of this article, please contact a member of the Brodies corporate team who would be happy to assist.