Avoiding director disputes when exiting a company

Directors can exit a limited company for a number of different reasons, ranging from voluntary resignation from their position to forced removal or disqualification of a director pursuant to the Companies Act 2006 (CA). This can prove to be fertile ground for disputes to arise either immediately after the director’s exit or in the following months or years.

Irrespective of the reasons for the exit, it’s crucial for all parties involved that the departure of a director is dealt with carefully and with consideration of the surrounding context and circumstances, in order to minimise the risk of any future disputes.

This article provides useful guidance on what to consider when a director departs a company, from the perspectives of both the departing director and the company.

How can a departing director avoid future disputes?

If you are an executive director, review your contract of employment or service agreement before leaving the company and ensure that:

• You have complied with its terms while you acted as a director
• You have complied with any leaving provisions, such as correctly adhering to your notice period
• You identify and understand whether there are any terms within the contract which will remain binding after your departure. For example, you may be subject to post-termination restrictions such as non-compete or non-solicitation clauses, so you should seek independent legal advice in relation to the enforceability of these clauses and what you can and can’t do after leaving.

It’s important for a departing director to protect their position as much as possible. You should seek to engage proactively with the company and its remaining directors before leaving to understand the terms of your exit. You should also clarify whether your future plans may impact upon the company after you leave and whether the company intends to enforce any restrictions against you.

It’s common for directors to also have a shareholding within the same company. If so, you need to establish whether you will remain as a shareholder after you leave. If not, you should identify the correct legal basis for transferring or selling your shares when leaving and any procedures you need to follow, which may be set out in any shareholders’ agreement or the company’s articles of association. Your contract or service agreement will often contain provisions in relation to being a ‘good’ or ‘bad’ leaver, which may in turn dictate whether you are compelled to sell your shares and at what price. You should familiarise yourself with these provisions to understand the options available to you.

If you have been removed involuntarily, the company should have complied with the procedures set out in the CA. For example, if you are removed as a director at a members’ meeting, you have the right to be heard at the meeting before the decision is made. This in turn may present the opportunity for you to leave under less controversial circumstances, for example by agreeing the terms of your departure and having more control over the process. This may ultimately be in the best interests of all parties and reduce the risk of a dispute arising.

Before departing a company, you should check whether you have made any loans to the company or conversely, whether you owe money to the company. Both parties should understand how any loans are to be repaid (either before or after departure) and how this affects the departure itself.

You should take extra care if leaving a company which is in financial difficulty or in danger of entering into insolvency. As a former director, an appointed insolvency practitioner may have grounds to review your conduct prior to the company later entering an insolvency process, which may make you liable to preference claims or for wrongful trading. This is a potential future liability you should consider if deciding to resign as a director.

What steps can be taken by the company to avoid disputes with departing directors?

If you have decided to remove or force the resignation of a director, the company should follow the correct procedures under the CA to avoid the potential for any future claim or challenges made by the departing director. You should also consult the company’s articles of association, the director’s contract of employment and any shareholders’ agreements in place (if the director is also a shareholder), before taking action to ensure compliance and avoid a dispute arising.

If the departing director is an employee, consider whether you should enter into a settlement agreement with the director. This will need to clearly record what has been agreed between the parties and any remaining obligations after the exit, to avoid ambiguity and misunderstanding which could easily lead to future disputes. The agreement could also include provisions restricting the ability of either party to bring claims against the other in the future as a preventative measure.

Companies should update their statutory records promptly following the departure of a director. You should notify Companies House within 14 days of departure and update your register of directors accordingly to avoid any misunderstandings and potential disputes arising at a later date.

Companies should put in place and follow a clear policy for departing directors, which sets out the process for departure. This should include, for example, guidance about the return of any confidential information held by the director or restrictions on the future use of the company’s intellectual property. By following a clear leaver’s process, you will guard the company against future allegations of unfair or unlawful removal by the departing director.

If a departing director previously took out loans from the company’s funds, ensure that these are settled before their departure or, if not, put sufficient protections in place in relation to failure to repay in the future. This may include assessing whether any personal guarantees given whilst a director remain valid and enforceable. Conversely, the departing director may attempt to cancel any guarantees or negotiate an indemnity, so you should factor in the risks and costs of taking or maintaining such actions.