Directors' appointment and removal.

[check] This checklist is for all directors, including non-executive directors, company secretaries and those involved in the appointment and removal of directors. This checklist sets out the different factors and explains the steps that should be taken following appointment and removal. It is important that all aspects are thoroughly understood and the correct procedures followed.

Who is a director?

(NB. The masculine form is used throughout to refer to both men and women.)

All directors, including non-executive directors, should be properly appointed in accordance with the provisions of the Companies Act 1985 as amended and company articles. However, the Companies Act defines a director as any person occupying the position of director, by whatever name called. It also defines a shadow director as a person in accordance with whose instructions the directors are accustomed to act. It follows that a person may be a director, and take on the obligations of directorship, without having been properly appointed.

Nearly all directors are flesh and blood human beings but this is not a requirement. A company may be a director of another company.

The law and the rules

The appointment and removal of directors is controlled by the Companies Act 1985 and by company articles. In some respects the Companies Act cannot be varied by company articles, but in other respects it is indicative only and its provisions may be amended or overridden by the articles.

Every company is required to adopt articles of association and these influence, among other things, the appointment and removal of directors. Table A (for a company limited by shares) and Table C (for a company limited by guarantee and having no share capital) are model sets of articles issued in conjunction with the Companies Act.

A company has a great deal of freedom concerning the content of its articles and they may be very relevant to the appointment and removal of directors. However, to the extent that it has not been excluded, Table A (or Table C) will apply.

The first directors

When an application to register a company is made, Form 10 is submitted to the Registrar of Companies at Companies House. This form, among other things, names the first directors and gives all the information that must be registered at Companies House. Each proposed director must sign the form to confirm his willingness to act.

When the Registrar of Companies has accepted the application, he will issue the certificate of incorporation. The first directors take office from the date of this certificate. They serve until the first annual general meeting where they may offer themselves for re-election.

Action checklist

1. Appointment of directors

The rules and procedure are governed by the articles. These can and do vary significantly from company to company, so it is always wise to check the articles of the particular company involved. The following is a summary of the position if a company has adopted the latest Table A without variation.

The members appoint a new director by ordinary resolution in a general meeting. No one, except a retiring director or a nominee of the board, may be proposed, unless notice of the proposal containing consent to act by the prospective director has been deposited with the company. This must be done between 14 and 35 days before the date of the meeting.

The directors may appoint a new director, either to fill a casual vacancy or as an additional board member. They may do this up to any maximum number specified by the articles, though Table A does not specify a maximum number. A director appointed in this way must retire from the board at the following annual general meeting, but he may offer himself for re-election at that meeting.

The members are the people who vote at general meetings and ultimately control the company. They may be shareholders but 'members' is the correct term. Not all companies have share capital and shareholders.

Individual company articles may specify certain qualifications for a person to be appointed a director. They may, for example, specify a nationality requirement or a residence requirement, or require that a director hold a specified number of shares. There are many other possibilities that may be encountered. Certain categories of people are prevented by law from being directors. These are listed in the section on the resignation and removal of directors.

Company articles may vary the above procedures and rules. They may, for example, vary the period of notice required to be given to the company. It is always wise to check the articles of the company concerned.

2. Alternate directors 

If the articles permit it, and Table A does permit it, a director may appoint an alternate director to act in his absence. The appointment may be for a specified period of time or it may last until it is revoked. Subject to any restrictions in the articles, the alternate director has exactly the same powers as the appointing director. The two directors cannot act simultaneously and the appointing director takes precedence when available and acting. The appointment of an alternate director may be considered when, for example, a director plans to be abroad for a considerable period. The procedure for appointing an alternate director will depend on the articles. Table A provides that an alternate director must be an existing director or a person approved by the directors, but individual company articles may vary this requirement. Table A requires the appointing director to give notice of the appointment in writing to the company, but it also states that the directors may require an appointment to be made in a different way.

3. Notification of an appointment to Companies House

All appointments, including an appointment of an alternate director, must be notified to Companies House within 14 days of the assumption of office. It is an offence not to do so and, although prosecutions are rare, defaulting companies, directors and company secretaries may be prosecuted and fined. Notification to Companies House must be by means of Form 288a. The form must be signed by an officer authorised to do so and it must also be signed by the new director to indicate his willingness to act.

If Form 288a is not submitted to Companies House, it does not mean that the appointment is not valid and that the new director has not taken on rights and responsibilities. It does mean that an offence has been committed.

4. Other steps to be taken following an appointment

If the company is a listed company, the Company Announcements Office should be notified of the appointment by the end of the business day following the decision.

Other common sense notifications should be considered and these might in some cases include pension fund trustees, trades union, bank managers, etc. It may be necessary to change bank mandates. A press release and other steps to publicise the appointment may be considered.

5. A director's obligations to provide information to the company

All directors (including alternate directors) have a statutory obligation to give to the company all the information that must be placed in The Register of Directors and Secretary. The same information is sent to Companies House on Form 288a and is:

* Present full surname and forenames.

* Any other surnames and forenames used within the preceding 20 years. Married women need not disclose their maiden surname if they do not wish to do so.

* Usual residential address.

* Nationality.

* Date of birth.

* Business occupation.

Other directorships held currently or within the preceding five years must also be notified. However, it is not necessary to disclose a directorship of a dormant company. It is also not necessary to disclose a directorship of a wholly owned subsidiary company or a directorship of a parent company that wholly owns the company in question.

If the director has any notifiable interests in shares or debentures, these should be disclosed to the company, as should any notifiable interest in contracts.

All the above are continuing obligations. There is a statutory obligation to notify any future changes as they occur.

6. The resignation and removal of directors

As with appointment, resignation and removal are very heavily affected by company articles. All sorts of eventualities and procedures are possible and it is important to check individual company articles. The following is an outline summary of the position if the latest Table A has been adopted without variation.

* A director may resign at any time. This will have effect as soon as it is communicated to the company unless the resigning director specifies some future date.

* Members may remove a director by means of an ordinary resolution requiring a simple majority. This is a statutory right that cannot be taken away by the articles.

* One third of directors retire at each annual general meeting. A retiring director may offer himself for re-election.

* A director of a public company or a private subsidiary of a public company must retire at the AGM following his 70th birthday. This does not apply to directors of private companies; members may re-appoint such a director having been given special notice of his date of birth.

* The directors may, but do not have to, vote to remove a director who misses all board meetings in a period of six months and does so without the permission of the other directors.

* A director vacates office if he is, or may be, suffering from a mental disorder and is admitted to hospital under the Mental Health Act or is the subject of a court order for detention or for the appointment of a receiver.

* An un-discharged bankrupt may not be a company director. Table A extends this to a person who has made a composition with his creditors generally. An un-discharged bankrupt may apply to the court for permission to be a director of a specified company but such an application is unlikely to succeed in other than very exceptional cases.

* A director may in some circumstances be disqualified for a specified period by the court from being a director of any company.

Table A does not allow directors to remove on or their number other than in circumstances described above. However, this power is often given in company articles.

7. Steps that must be taken after resignation or removal

Companies House must be notified within 14 days and this must be done by means of Form 288b. Failure to do this is an offence that can lead to a prosecution and fine for a company, the directors and the company secretary. An appropriate entry must be made in the Register of Directors and Secretary.

If the company is listed, the Company Announcements Office should be notified. In all cases other common sense steps and notifications should be considered including, for example, changing bank mandates.

8. The power of the members to compel the holding of an extraordinary general meeting

Members can insist on the holding of a general meeting and all lawful business may be conducted at it including the removal of directors and the appointment of new directors. This is a statutory right which cannot be removed by the articles. It may be made easier to call such a meeting, but not more difficult.

A meeting may be requisitioned by members who have at least 10 per cent of the voting rights or who have at least 10 per cent of the paid up share capital and have voting rights. The directors must within 28 days of receipt of a valid requisition call a meeting, giving 21 clear days' notice of it.

If the purpose of a requisitioned meeting is to remove a director, special notice of the resolution must be given to the members. The threatened director may circulate a statement to the members (so long as it is not defamatory) and he may do this at the expense of the company. He may also attend the meeting and (subject to the chairman's authority) speak at it.

Useful reading

Company directors desktop guide, 2nd ed, David M Martin

London, Thorogood, 2004

Becoming a director : learn the basics and become an effective and successful director

Victor Hughes

Oxford, How to Books, 2004

The combined code on corporate governance 

Financial Reporting Council 

London, 2003

Corporate governance and chairmanship : a personal view, Adrian Cadbury 

Oxford, Oxford University Press, 2002

The company directors guide : your duties responsibilities and liabilities,

Tony Renton and John Watkinson 

Institute of Directors, London, Kogan Page, 2001

Boards at work : how directors view their roles and responsibilities, Philip Stiles and Bernard Taylor 

Oxford, Oxford University Press, 2001

Useful addresses

Companies House, Crown Way, Maindy, Cardiff , CF4 3UZ

Tel: [phone] www.companieshouse.gov.uk

Companies House, 37 Castle Terrace, Edinburgh, EH1 2ED

Tel: [phone] www.companieshouse.gov.uk