How do I deal with directors’ misconduct?

Solicitor, Callum Duff

If your company seeks to remove a director based on misconduct, that misconduct must be:

1. material;
2. recent; and
3. the director must have been properly notified of their misconduct.

If not, and the director is also a shareholder of the company, the decision to terminate that director may leave your company exposed to an unfair prejudice petition.

The Companies Act 2006 (section 994) allows shareholders of a company to seek relief from the courts from any prejudice unfairly suffered due to actions taken by the company, by presenting a petition. This is known as an unfair prejudice petition.

In Willoughby v Cole and another [2024], Mr Willoughby successfully brought a petition for unfair prejudice, due to Mr Cole and Mr Evans (his co-shareholders and co-directors) removing Mr Willoughby from his role as a director of Simply Naturals Ltd relying on claims of Mr Willoughby’s misconduct that had taken place ten years prior.

When recruiting Mr Cole and Mr Evans to join Simply Naturals Ltd as directors and shareholders in 2011, Mr Willoughby made representations to Mr Cole and Mr Evans about the company’s financial success overseas, amongst other things. It transpired in the years that followed Mr Cole and Mr Evans joining the company, that the representations made by Mr Willoughby were not true. However, Mr Cole and Mr Evans didn’t act to address the misconduct of Mr Willoughby at the time.

It wasn’t until 2022, following further instances of minor misconduct (such as arriving late to work, removing CCTV cameras, and dealing with personal matters while in the office) that Mr Cole and Mr Evans terminated Mr Willougby’s role as director for all of Mr Willoughby’s misconduct to date.

Mr Willoughby presented an unfair prejudice petition to prevent his termination, on the basis that the company’s decision to terminate him as a director based on historic misconduct and more recent minor instances of misconduct, without an offer to buy Mr Willoughby’s shares, was unfair.

The court decided in Mr Willoughby’s favour, holding that the events which occurred in 2011 (Mr Willoughby’s misrepresentations) could not be used as justification to remove Mr Willougby as a director, due to the time that had passed since those events. The court decided that Mr Cole and Mr Evans’ decision to terminate Mr Willoughby based on the more recent minor instances of Mr Willoughby’s misconduct was unfairly prejudicial.

The key points to note from this case are:

• A company should take appropriate steps to address the misconduct of a director at the time of the misconduct, or as soon as practicable following becoming aware of the misconduct.
• A company’s failure to address, or a delay in addressing, misconduct of a director may be construed by the courts as a waiver in regards to the misconduct.
• It is crucial that the removal of a director is done following appropriate process and procedure.

If you have any queries or concerns relating to the removal of a director, or relating to a director’s misconduct, don’t hesitate to contact a member of Kuits’ Dispute Resolution team via email info@kuits.com or telephone 0161 832 3434.