Why this is a bad idea.
Directors are and have always been the captains of their ship.
They make the decisions, set the overall direction and strategy for where the company is going to go and then work with their employees to implement their vision.
Sometimes it works out, sometimes it doesn’t, but at all times the directors are in charge and should have a firm hand on the wheel.
But what if they aren’t completely onboard with what needs to be done? What happens if the directors are disengaged that they decide to abandon the ship? Are they allowed to just outright abandon a company by resigning as director?
BusinessRescueExpert looks at the various scenarios in which this could happen and what happens – to them and the company – if they actually do make that leap.
Sometimes circumstances arise where a company can be left with no active directors.
This is most likely to occur if there is a sole director in charge. Apart from tragic accidents or deaths in service, a sole director can choose to resign from their business or for businesses with multiple directors, shareholders can vote to remove them from office under the authority granted by the Companies Act 2006.
Depending on the specific articles of association for a business, the process of removing a director might even be simpler than the process described here. Even if they don’t, the Companies Act cannot be excluded from Articles so the statutory process is available for any business to follow.
The Act gives shareholders the right to remove directors for any reason or no specific reason at all if it follows a majority vote under an ordinary resolution.
Shareholders have to give “Special Notice” to the company of their intention to remove a director – which is given 28 days before any proposed shareholders meeting where the matter will be discussed and voted upon.
Depending on the company’s Articles, shareholders agreement or any director service contracts, it might even be quicker to remove them but the 28 days is a statutory period.
Once underway the company has an obligation to send a copy of the proposed resolution to the director concerned and at least 14 days before the proposed meeting, directors must give notice to all shareholders that it is taking place and what it is about.
The director concerned is entitled to make representations to the company and speak at the meeting to make their case. The board can also make representations to shareholders, especially if they don’t agree with the motion.
The decision itself is quite straightforward and is conducted on a simple poll vote or even show of hands. If more than 50% of shareholders in attendance vote for the motion then the director can be legally removed.
Some directors may refuse to call a meeting to allow the removal but section 303 of the Companies Act makes provision for this and allows 5% of shareholders to call a meeting under it. As a simple majority is required then it could take only a small number of shareholders to hold and pass a vote to remove directors.
The Companies Act 2006 states that any private limited company has to have at least one active director while public limited companies have to have at least two.
Any business that does not meet these minimum requirements will be held to be in direct breach of the legislation.
In the case of the resignation of a sole director, Companies House will get in touch to inform them of their responsibilities and let them know that they have to appoint a new director with a specific deadline.
If the business fails to do this then it will be struck off or dissolved. If this happens then any assets still judged to be owned by the business will either be auctioned off or they will become the property of the Crown under a convention called Bona Vacantia that we’ve written about previously.
Should a company be left without directors for any reason then shareholders can request a general meeting in order to appoint new ones or a new one.
If they don’t have the authority to call one then they can apply to the Court who can order a general meeting on their behalf.
Are there any negative consequences for directors who resign?
Sole traders who are the only director of their business are able to resign as directors.
Although this would leave the company with various negative consequences that might follow without it being in a technical breach of their duties to the business.
Some businesses may have legal clauses in place to stop sole directors leaving until a suitable replacement is found and while others might consider it poor form to abandon the company, there is nothing legally stopping them from doing so.
In this situation, the director would inform the shareholders of their decision to resign so they can begin the replacement process or take part in it themselves. If the sole director is also the sole shareholder of the business then they can then either look to sell the business as a going concern or begin the process of closing it down like any other limited company.
Chris Horner, insolvency director with BusinessRescueExpert said: “We’re hearing more of directors who think that they can absolve themselves of responsibility and financial obligations by just trying to metaphorically jump overboard and leave the ship to sail on by itself.
“The fact is this is not the case.
“The biggest problem with directors trying to effectively abandon their company by resigning and removing themselves as significant controllers is if they are still shareholders or not.
“Unless someone specifically agreed to buy their shares then they are classed as de facto directors – which means that to all intents and purposes they will still be seen as in control by authorities such as HMRC and the Insolvency Service.
“New legislation brought in in 2020 now allows for investigations of the conduct of directors of companies that are suspected of dissolving or being struck off improperly – that is with outstanding debts.
“If they find that they have tried to abandon their company or dissolved the business while it still had outstanding debts then they could find themselves made personally liable for these same debts and any others that have been incurred.
“While we appreciate that things are as difficult for directors this coming year as they have been for every other year in this decade, looking to abandon their business and bail out is not the right way to handle things.
“Any director that is concerned about their company’s future should get in touch to discuss the situation first without considering a move as rash as abandoning their business.
“They would soon find out that they had actually made things worse.”
BusinessRescueExpert offer a free initial consultation to any director who needs advice on the best way to close their business efficiently or to restructure it to give it the best chance of recovery and revival.
An experienced advisor will be able to outline all the available options when they get a better understanding of the unique situation you’re facing