Legitimacy of Director Removal under Companies Act 2006

Abstract

The Companies Act, 2006, section 168 provides the directors with the power to remove another director by passing a general resolution and in the case of Westlands Publishing Limited, Shirley Potter was removed from the seat of director, while complying with all the procedural needs stated under section 169 of the Companies Act, 2006. As such, the remaining directors of the Westlands Publishing Limited has stopped the dividends to be paid to Shirley Potter as well. This report shall strike to understand the legitimacy of removal of Shirley Potter as director in the Westlands Publishing Limited and other consecutive steps that the other remaining directors of the abovementioned company has taken herein and provide with an advice that would keep the value of the shares of the company straight.

Objectives

On the complaint made by Shirley Potter, the director who has been removed from Westlands Publishing Limited, to our firm, this report has been made and the objectives of this particular report are as follows:

To understand whether the removal of Shirley Potter as director is legitimate or not.

To understand and advice Shirley Potter whether she can challenge the moves of the other two directors of the company.

To understand whether Shirley Potter’s shareholder’s dividend income can be restricted by the directors of the company or not.

To understand whether the move of the remaining directors of the abovementioned company in increasing their salary by a margin of 25% is legitimate or not.

To advice what to do with the shares of a company that is steadily declining towards bankruptcy.

The area of expertise

For the purpose of writing this report, a brief analysis has been done of the given case study narrated by Shirley Potter, the ex-director of the Westlands Publishing Limited and the key points or problems of the given case study has been identified herein.

Does Shirley Potter have a right to protest against her removal from the position of director under the Companies Act, 2006 and if she has a right to do so, under what legal procedure, she can take such steps and what are the requirements for such legal steps?

Can the shareholder’s dividend income be stopped by the directors of the Company and what steps can be taken by Shirley Potter to know her shareholder’s right?

What rights Shirley Potter has as an ex-director to restrict and refrain the Westelands Publishing Limited from going bankrupt and what legal steps can Shirley Potter take against the remaining directors of the company?

Analysis

In order to analyze the abovementioned case study of Shirley Potter and Westlands Publishing Limited, it is necessary to discuss the provision of section 168 of the Companies Act, 2006. According to the Companies Act, 2006, a person can be removed from the position of a director by an ordinary resolution before the expiration of his/her period, notwithstanding anything mentioned under any contract of the director whatsoever. However, the same section also says and repeats that this section shall not be misused for the purpose of depriving someone or not to be taken as a derogatory power to remove a director as well. Also, as Shirley Potter was also a shareholder of the same company, removing her as director might raise the concern of unfair prejudice or unfair dismissal against the director herein.

From the limited information that has been shared by Shirley Potter, it can be concluded that she was removed from the board of directors due to personal conflicts and as she has exhausted her right to protest under section 169 of the Companies Act, 2006 as it has been mentioned that all the procedural laws under the same has been complied by the other two directors and shareholders of the company herein, she can file substantial compensation claim against the company.

It is given that Shirley Potter is also a shareholder of the company along with the other two directors and for a director who is also a shareholder of a company, different provision has been mentioned under the Companies Act, 2006. Under section 994 of the Companies Act, 2006, it has been mentioned that a shareholder can apply for a petition under the claim of being subjected to ‘unfair prejudiced conduct’ under subsection 1 of section 994 herein. In the case of Gray & Ors v. Re Braid Group (Holdings) Ltd, it was held by the court that if a shareholder of a company can prove that he/she has been subjected to unfairly prejudiced conduct by other shareholders or directors of the company, he/she shall therefore reserve the right to file for substantial damage claim. Under this case, it was decided that other shareholder of the company shall buy out the shares of the removed shareholder at the market price herein.

1. The Companies Act, 2006, s.168
2. Ibid
3. The Companies Act, 2006, s. 168(5)
4. Cheffins, Brian R. “The Undermining of UK Corporate Governance (?).” (2013). Oxford Journal of Legal Studies, vol. 33, no. 3, pp. 503–533.
5. Bushell v Faith, [1970] AC 1099
6. Bebchuk, Lucian Arye. “The Case for Increasing Shareholder Power.” (2005). Harvard Law Review, vol. 118, no. 3, pp. 833–914

From the limited information presented by Shirley Potter, it can be deduced that she was removed from the position of directors but she cannot be forced to leave the position of being a shareholder of the company. As it has been mentioned under the given problem that there was not any shareholder’s agreement drafted between the shareholders and as such no provision was made for the removal of the shareholder under the standard model article with no amendments, it is difficult to remove a shareholder involuntarily. In the case of having no shareholder’s agreement, the other shareholder can remove a shareholder with the help of a majority i.e. 75% of votes in their shareholder meeting. However, such voting against a shareholder can only work in the case where the shareholder is a minority shareholder and only possesses 25% of the shares of the company.

Analyzing the dividend aspect of the given case problem, it can be said that dividend is defined as the profit of the company distributed between the shareholders. The policy of dividend is completely in the hands of the directors and it is not the place of the shareholders to have a say at the dividend policy of a company herein. Dividend is not the absolute right of a shareholder and it is often decided by the board of directors according the corporate governance of the United Kingdom. Hence, in the given case problem, as it has been mentioned by Shirley Potter that after removing her from the position of director, the dividend payment has been stopped by the directors, which was the majority of her income herein.

1. Ibid
2. Gray & Ors, v. Re Braid Group (Holdings) Ltd, [2015] ScotCS CSOH_146
3. Drury, R. R. “The Relative Nature of a Shareholder's Right to Enforce the Company Contract.” (1986). The Cambridge Law Journal, vol. 45, no. 2, pp. 219–246.
4. Ireland, Paddy. “Company Law and the Myth of Shareholder Ownership.” (1999). The Modern Law Review, vol. 62, no. 1, pp. 32–57.
5. Drury, R. R. “The Relative Nature of a Shareholder's Right to Enforce the Company Contract.” (1986). The Cambridge Law Journal, vol. 45, no. 2, pp. 219–246.
6. The Companies Act, 2006, s.830.
7. Shao, Liang, et al. “National Culture and Dividend Policy.” (2010). Journal of International Business Studies, vol. 41, no. 8, pp. 1391–1414.

However, for the purpose of this given case problem, a special precedent can be referred which was decided in the recent years regarding dividends payment to the shareholders. In the case of Donald Booth & others v Clarence Kenneth Fredrick Booth & others, the court essentially took notice of the ‘no dividend’ policy of the company and the anarchy of the company directors were kept under check as well. In the given case study, the directors adopted a no dividend policy to the shareholders yet they increased their salaries by a margin which seemed prejudicial against the shareholders. Hence, in this case, it was decided by the court that if the company is adapting to a ‘no dividend policy’, it should provide the shareholders with suitable justification of the same and they have to ensure that the policy has been adapted for the success of the company.

From the limited information as shared by Shirley Potter, as soon as the remaining directors of the abovementioned company has denied to provide Shirley with dividends, they have increased their director’s salary by a margin of 25%, on the top of losing a lucrative contract with a client. Hence, in given case problem, Shirley Potter being a shareholder, can be concerned of the company’s status of being insolvent by the arbitrary moves adopted by the current directors herein. Also, the abovementioned case precedent of Donald Booth fits perfectly with the given case problem where incomprehensive and mischievous moves or steps have been adopted by a company, the shareholders shall reserve the right to question the no dividend policy and file case under the same before a court of law.

Possible outcomes, suggestions and advices – A Discussion

From the above analysis based on the limited information provided by Shirley Potter, it can be suggested and advised that she should file a petition under section 994(1) of the Companies Act, 2006 before the court of law. In the case of Kohli v. LIT & Ors, it was held that a shareholder, who was removed as a director of the company, can institute a case before the court to investigate into the matter under the alleged unfairly prejudiced conduct. Also, in the case of Hale v. Waldock, the court provided the petitioner with the right to institute a case against the company as the petitioner was denied of financial benefit herein. Thus, to resolve the first part of the problem, Shirley Potter can resort to court action.

1. Edwards, Jeremy. “Does Dividend Policy Matter?” (1984). Fiscal Studies, Vol. 5, No. 1, Pp. 1–17.
2. Donald Booth & Others v Clarence Kenneth Fredrick Booth & others, [2017] EWHC 457 (Ch)
3. Kohli v. LIT & Ors, [2009] EWHC 2893 (Ch)
4. Hale v. Waldock, [2006] EWHC 364 (Ch)

As of the second problem, it can be deduced from the abovementioned analysis that Shirley Potter can be removed as a shareholder of the company as removal of shareholder in the absence of a shareholder’s agreement is complicated. From the limited information that has been provided in the given case study, it can be assumed that Shirley possesses 33% of the share of the company along with the two other directors and hence, she cannot be removed from the position of shareholder by a majority voting of 75%.

As Shirley Potter cannot yet be removed from the position of shareholder of the company, it can be deduced from the abovementioned analysis that she has enough right to question the conduct of the other shareholders in the position of directors and the no dividend policy could be questioned under the Companies Act, 2006 as well. Also, referring to the famous recent case of Donald Booth & others v Clarence Kenneth Fredrick Booth & others, the mischievous and incomprehensive behaviour of a company’s directors can be questioned before the court of law and a shareholder can question the policies of dividend set by the company’s director as well.

Conclusion

Hence, the report herein summarizes the issues presented by Shirley Potter and a comprehensive analysis along with possible outcomes and legal suggestions have been provided where it has been mentioned that Shirley Potter still retains the position of a shareholder in the company and as such can question the policies of the company and for the purpose of being removed as a director, she can institute a case before the court of law under 994(1) of the Companies Act, 2006 (Supportive case laws and analysis have been provided in the previous segment).

1. Fisher v. Cadman & Ors., [2005] EWHC 364 (Ch);
2. Drury, R. R. “The Relative Nature of a Shareholder's Right to Enforce the Company Contract.” (1986). The Cambridge Law Journal, vol. 45, no. 2, pp. 219–246.
3. The Companies Act, 2006, s. 830
4. Donald Booth & others v Clarence Kenneth Fredrick Booth & others [2017] EWHC 457 (Ch)

Continue your journey with our comprehensive guide to Legal Issues in the Transfer of Contracts and Shareholder Claims.

BIBLIOGRAPHY

Journals

Bebchuk, Lucian Arye. “The Case for Increasing Shareholder Power.” (2005). Harvard Law Review, vol. 118, no. 3, pp. 833–914

Cheffins, Brian R. “The Undermining of UK Corporate Governance (?).” (2013). Oxford Journal of Legal Studies, vol. 33, no. 3, pp. 503–533

Drury, R. R. “The Relative Nature of a Shareholder's Right to Enforce the Company Contract.” (1986). The Cambridge Law Journal, vol. 45, no. 2, pp. 219–246

Edwards, Jeremy. “Does Dividend Policy Matter?” (1984). Fiscal Studies, Vol. 5, No. 1, Pp. 1–17

Ireland, Paddy. “Company Law and the Myth of Shareholder Ownership.” (1999). The Modern Law Review, vol. 62, no. 1, pp. 32–57

Shao, Liang, et al. “National Culture and Dividend Policy.” (2010). Journal of International Business Studies, vol. 41, no. 8, pp. 1391–1414

Legislation

The Companies Act, 2006

Case Laws

Bushell v Faith, [1970] AC 1099

Donald Booth & Others v Clarence Kenneth Fredrick Booth & others, [2017] EWHC 457 (Ch)

Fisher v. Cadman & Ors., [2005] EWHC 364 (Ch)

Gray & Ors, v. Re Braid Group (Holdings) Ltd, [2015] ScotCS CSOH_146

Hale v. Waldock, [2006] EWHC 364 (Ch)

Kohli v. LIT & Ors, [2009] EWHC 2893 (Ch)