When starting a company for the first time, the lines between shareholders and directors can often seem blurred – particularly when the founders of the company are also the directors and the sole shareholders!
Whilst this terminology can seem interchangeable, understanding the difference between directors, shareholders and founders is important to grasp from an early stage.
In this article, we home in on directorships to give you an idea of who directors are, what they do and how you can appoint (and terminate) their directorships.
Directors – who are they and what do they do?
Directors are appointed by the shareholders of the company to be responsible for the day-to-day running of the business. In doing this, directors are under a duty to make decisions which promote the best interests of the Company. Directors are also bound by a number of general duties which they owe to the company as set out in the Companies Act 2006 (the “CA 2006”).
A company can set further rules relating to how the directors run the company detailed in the company’s articles of association and shareholders’ agreement (if the company has one) provided that such rules do not conflict with the CA 2006 provisions.
Appointing a director
How many directors must a company have?
The CA 2006 requires that private companies must have at least one director. At least one director must be a natural person (i.e. an individual). However, it is important to check the company’s articles to see whether the shareholders have decided that a minimum, or indeed maximum, number of directors is required.
While the CA 2006 does not limit the number of directors a company may have, there are of course commercial considerations that may influence such a decision, such as costs and practicality.
Can anyone be appointed as a director?
Yes… unless the proposed director:
- is younger than 16 years old when the appointment takes place;
- has been declared bankrupt or is subject to bankruptcy restrictions;
- is subject to an order made under the Insolvency Act 1986;
- is subject to a disqualification order which restricts them from acting as a director;
- is also an auditor of the company;
- is not a natural person and there are no other natural directors (see above);
- is prevented by any restrictions set out in the articles; or
- would be unable to exercise the reasonable care, skill and diligence that is required under the CA 2006.
Appointing directors to a new company
Where a director is being appointed to a new company, the company must deliver a number of details of the director to Companies House. A a statement must also be included from the subscribers that the proposed director has consented to act as such.
The new director will be deemed to be appointed from incorporation of the company. This is usually all wrapped up in the company incorporation form filed at Companies House when the company is incorporated.
Appointing further directors to a company
Typically, both the shareholders and directors will be able to appoint further directors. If the company’s articles are silent and there is no reference in the shareholders’ agreement to the appointment of directors, the shareholders will have this power.
On the appointment of a new director, a company must ensure its company’s register of directors is updated. The company must also give notice to Companies House within 14 days of the date of the appointment, which can be done online or by filing an AP01 form. This deadline has been temporarily extended to 42 days due to the Covid-19 pandemic at the time of writing.
Removing a director
In most cases, a director resignation can be effect by the resignation letter of the director being table at a meeting of the directors. However, there may be circumstances where the directors and the shareholders views on the Company differ, and the shareholders wish to remove a director from office.
A director can be removed by the shareholders if the shareholders pass an ordinary resolution by a simple majority (over 50%).
Other circumstances in which a director can be removed include where;
- the director is required to resign by a court order;
- any events specified in the company’s articles come to fruition, for example if the director is declared bankrupt;
- the director is contractually required. For instance, many service agreements provide for a director’s appointment to be terminated when their employment ceases; or
- the director dies (or is dissolved in the case of a corporate director).
The company must give notice to Companies House within 14 days of the individual ceasing to be a director and if the company is a listed company, there are further rules that must be adhered to.
Removing a director by a shareholders’ resolution can be more difficult than first appears (after all, it is the directors of the Company who have to call a shareholder meeting in the first place). If you as a shareholder are looking to remove a director, we recommend you seek legal advice. It is crucial that directors are removed fairly. This can prevent claims of wrongful or unfair dismissal.
To discuss appointing and removing directors from your company, get in touch with us.