How are directors appointed and removed?

Appointment process and eligibility

Directors are typically appointed by shareholders or existing board members, in accordance with the company’s articles of association. A director must be at least 16 years old and not disqualified by a court order. Companies House must be notified of any new appointments.

Removal by shareholders or the company

A director may be removed by an ordinary resolution of shareholders under section 168 of the Companies Act 2006, subject to the provisions in the company’s articles and any service agreement. Notice must be given, and the director usually has the right to be heard at the meeting where the resolution is considered.

Resignation and disqualification

A director may resign at any time, but the process should comply with the company’s internal procedures. Directors can also be disqualified by the courts for reasons including misconduct, unfitness, or breach of legal duties. Disqualification can last up to 15 years and prohibits the individual from acting as a director or being involved in company management.

What are a director’s key duties?

Statutory duties under the Companies Act 2006

Directors owe seven key duties under the Companies Act 2006, including:

1. To act within their powers;
2. To promote the success of the company;
3. To exercise independent judgment;
4. To exercise reasonable care, skill, and diligence;
5. To avoid conflicts of interest;
6. Not to accept benefits from third parties;
7. To declare interests in proposed transactions or arrangements.

These duties apply to all directors, whether executive, non-executive, or de facto.

Fiduciary duties and duty of care

Directors are fiduciaries, meaning they must act in the best interests of the company and avoid personal gain at the company’s expense. They also owe a duty of care, requiring them to act with the skill and diligence that may reasonably be expected of a person in their position.

Duties in insolvency or financial distress

When a company is in financial difficulty or near insolvency, directors must prioritise the interests of creditors over those of shareholders. Continuing to trade while insolvent may expose directors to personal liability for wrongful trading.

What are a director’s rights?

Right to remuneration and expenses

A director may receive remuneration and reimbursement of reasonable expenses if permitted under the company’s articles or by shareholder approval. The specifics are usually set out in a service agreement (a type of contract of employment) or board resolution.

Right to be indemnified

Directors may be entitled to indemnity against personal liability incurred in the performance of their duties, subject to restrictions under company law. Many companies also maintain directors’ and officers’ (D&O) insurance to cover potential claims.

Right to information and participation in decision-making

Directors are entitled to access company information necessary for fulfilling their responsibilities and to participate in board meetings and decisions, unless removed or suspended in accordance with company rules.

Employment status and service agreements

Director vs. employee – legal distinction

Being a director does not automatically make someone an employee. However, an executive director who works for the company under a contract of employment will usually have employee status, with associated rights such as unfair dismissal protection. Non-executive directors generally do not qualify as employees.

Importance of a written service agreement

Executive directors should have a written service agreement outlining the terms of their role, including duties, working hours, pay, termination provisions, and post-termination restrictions. This agreement helps to clarify expectations and limit future disputes.

Terms commonly found in director service contracts

Typical provisions include duties, salary, bonuses, benefits, confidentiality obligations, restrictive covenants (such as non-compete clauses), and notice periods. These contracts often include clauses addressing intellectual property, data protection, and company policies.

Termination and disputes

Grounds for removal or dismissal

Directors can be dismissed for misconduct, underperformance, or loss of trust. Grounds for removal may be defined in the company’s articles or the director’s service agreement. Shareholder approval may be required for formal removal from the board.

Read more: shares and share options

Wrongful or unfair dismissal claims by directors

If a director is also an employee, they may bring claims for unfair dismissal (subject to eligibility), constructive dismissal or wrongful dismissal if dismissed in breach of contract. These claims may be brought in the Employment Tribunal or civil courts.

Read more: Employment Tribunal claims – a guide for employees

Exit negotiations and settlement agreements

In contentious exits, directors may negotiate a settlement agreement, typically involving a financial settlement, confidentiality clauses, and waiver of legal claims. Legal advice is usually required for such agreements to be binding.

Read more: how to negotiate a settlement agreement

Other types of claims

Directors may have claims under the Equality Act 2010 if they are a worker or employee of a business, and may (depending on their employment status) therefore have the right to bring particular types of claim such as: discrimination, harassment, sexual harassment, and victimisation.

Liabilities and risks for directors

Personal liability and director disqualification

Directors can be held personally liable for breach of duties, fraudulent or wrongful trading, and health and safety violations. Regulatory bodies may pursue disqualification where appropriate.

Breach of duty and derivative claims

Shareholders may bring derivative claims on behalf of the company if directors breach their duties. Such claims often relate to mismanagement, conflicts of interest, or misuse of company assets.

Criminal and regulatory exposure

Directors may face criminal prosecution or regulatory penalties for offences such as bribery, fraud, data breaches, or health and safety violations. Regulators such as the Financial Conduct Authority (FCA) or Health and Safety Executive (HSE) may investigate directors in relevant sectors.

Directors and shareholders: roles and conflicts

Balancing director and shareholder interests

Directors are expected to act in the best interests of the company as a whole, which may differ from the interests of individual shareholders. This can lead to tension, particularly in family-run or closely held companies.

Managing conflicts of interest

Directors must declare any conflicts of interest and may be required to step back from relevant decisions. Failure to manage conflicts properly can result in breach of duty and personal liability.

Shareholder agreements and director obligations

Shareholder agreements often set out additional requirements or restrictions on directors, particularly in private companies. These may include reserved matters requiring shareholder consent or stipulations on dividend policies.

When to seek legal advice

Disputes, resignations, or removal

Legal advice is advisable if a director is involved in a dispute, facing removal, or considering resignation. Proper process should be followed to avoid breach of contract or fiduciary duties.

Regulatory investigations or allegations of misconduct

Where allegations of misconduct or regulatory issues arise, directors should seek legal representation promptly to protect their position and comply with reporting duties.

Drafting or reviewing director service agreements

Directors should ensure that service agreements accurately reflect their responsibilities and include appropriate protections. Legal review can help identify risks and improve clarity.