There could be any number of reasons why a director of a company would resign or otherwise no longer remain in office. He may be presented with another business opportunity, become bankrupt and therefore be unable to be a director, or perhaps the termination of his appointment would follow as a result of his death or incapacity.
What are the legal requirements?
The Companies Act 2006 states that a private company must have at least one director and also states that a company must have at least one director who is a natural person, as opposed to a corporate vehicle. In addition, the constitution of the company will set out the quorum for board meetings which will often stipulate that a company must have at least one director to hold a quorate meeting. This should always be checked as it is common for the quorum to be set at a higher number.
Are there any consequences for the director himself or for the company for breaching the legal requirements?
Despite the provisions set out in the Companies Act 2006 and the articles of association of the company, a sole director may resign from office even if his action will leave the company with no directors or have a catastrophic effect on the company’s business or its reputation in its market. The director will not be in breach of his fiduciary duties to the company.
For the director himself, his fiduciary obligations to the Company following his resignation are limited: the director will remain under a fiduciary duty to avoid conflicts of interest (as regards the exploitation of opportunities or information of which he became aware whilst he was a director) and a duty not to accept benefits from third parties (in relation to things done whilst he was a director).
When a sole director resigns leaving a company without management, the company itself will be in breach of the Companies Act 2006 and could receive a direction from the Secretary of State to appoint directors. Any such direction would advise the company of the statutory requirement which has been breached, what the company must do to comply with the direction (which will be to make the necessary appointments and notify the registrar of companies of the appointments) and the time period within which it must do so. The period will be within one and three months of the date of the direction. The direction will also inform the company of the consequences of failing to comply with the direction.
If the company fails to comply with the direction of the Secretary of State, it commits an offence together with every officer of the company who is in default and each may be liable to a fine. Critically, however, this does not extend to the director who has handed in his notice.
How can the issue be remedied?
If a company is left with no appointed directors, the shareholders may have authority under the company’s articles to appoint directors. Where there is no power in the articles for the shareholders to appoint directors and this power has been delegated to the board, case law has suggested that the general meeting (ie the shareholders) can act instead of the board.
It should be noted that any general meeting called to deal with the appointment of directors should be properly called. The articles would need to be checked to ensure that the members have authority to call a general meeting. If there is no such power contained in the articles, an application may be made to the Court which has the power to order a general meeting where it is impractical to call a meeting in the manner set out in the articles of the company or under the Companies Act 2006.
So whilst a company will need to address the consequences of its last director leaving office, for the resigning director the consequences are minimal.
For more information, email firstname.lastname@example.org.