Directorial Dysfunction: When You Can Remove Your Directors

‘Edward Sharpe and the Magnetic Zeros’ is one of my favourite American folk rock bands. Jade Castrinos’s voice is so haunting, it can transport you back to the 70s. Nonetheless, though Castrinos and the rest of the members seem like a match initially, it was apparent that things were not working out between the two. Both sides just could not stand each other. Which is why, when Castrinos left the band in 2014, I was devastated. When she left, ‘Edward Sharpe and the Magnetic Zeros’ lost its attraction. 

If you, as a shareholder, have a director who is in breach of his fundamental duties to the company, your options in that instance are clear – give him a yellow card or a red card! 

But, what if the situation is less clear? 

What if you have a director who has been thriving in carrying out his duties but you just do not like him. 

After all, why would you want a Negative Nancy, a Debbie Downer or a Bob Bummer putting a damper on your party? 

The Source of the power to remove a director

For public companies, the power to remove a director is derived from Section 206 of the Companies Act 2016.

For private companies, such power can either be derived from the constitution of the company or Section 206 of the Companies Act 2016. However, unlike its predecessor (Section 128 of the Companies Act 1965), Section 206 of the Companies Act 2016 gives primacy to the constitution of the private companies in the removal of a director [see Low Thiam Hoe & Anor v Sri Serdang Sdn Bhd & Ors [2020] 1 LNS 75 (“Low Thiam Hoe case”)].

The grounds to remove a director

Generally, shareholders are not required to provide any reason to remove a director. Whilst a company’s constitution may or may not prescribe the grounds for the removal of a director, Section 206 of the Companies Act 2016 does not.

According to the decision of the Hong Kong Court of Appeal in Yeung Bing Kwong Kenneth v. Mount Oscar Ltd [2019] HKCU 2413 (“Mount Oscar case”):-

“[22] The power given to the shareholders is unfettered and may be used for a number of aims. It allows shareholders to remove directors who are performing poorly, as well as those acting competently and within their powers but in a way that may be contrary to the wishes of the shareholders. This is an apparently “tough mandatory rule” that allows the shareholders by ordinary resolution at any time to remove any or all of the directors from office without having to assign a reason for so doing (Companies Directors: duties, Liabilities and Remedies (3rd ed) by Simon Mortimore QC at 7.02; Introduction to Company Law by Paul Davies at p 17 and 125). There is simply no requirement that the power to remove a director must be exercised for cause.”

The above is corollary of the cardinal principles that:- 

• Courts should be slow in interfering the internal management of a company, particularly when such management was in the proper exercise of the powers of the company; and 
• Even if the process undertaken by the company in removing the director is irregular, the company can set it right at any moment. 

[see the Mount Oscar case]

However, there are exceptions to this. 

According to Mohamad Ariff Yusof J (as His Lordship then was) in Dato’ Raja Azwane Raja Ariff v Dato’ Man Mat & Ors [2011] 8 CLJ 633:-

“[20] Second, it needs to be also stated as a competing general proposition that the exercise of corporate powers, although technically they might be consistent strictly with the procedure of the company’s constitution, can be open to challenge on the basis of equitable principles depending on the precise circumstances of a particular case. One basis for this jurisdiction is the principle that power cannot be used for a collateral or improper purpose.”

Examples of when a director was removed for a collateral or improper purpose are as follows:-

When such removal was made to stifle or discontinue a civil suit [see Koh Jui Hiong @ Koa Jui Heong & Ors v Ki Tak Sang @ Kee Tak Sang & Ors [2009] 8 MLJ 818];

When such removal was made in retaliation for the misdeeds of the director’s worker than for any breach of the director’s duties [see Eng Gee Seng v Quek Choon Teck and others [2010] 1 SLR 241]; and

When the circular resolution which purported to remove the director in question was backdated, and thereby, failed to provide the said director with a bona fide and effective notice [see Dato’ Raja Azwane Raja Ariff v Dato’ Man Mat & Ors [2011] 8 CLJ 633].

The procedure to remove a director

For the removal of a director pursuant to Section 206 of the Companies Act 2016:- 

• a special notice has to be issued on the director in question 28 days before the general meeting is convened [see Subsection 206(3) of the Companies Act 2016 read with Subsection 322(1) of the Companies Act 2016]; and
• in respect of private companies, the said companies cannot bypass a meeting by removing a director through a circular written resolution [see Subsection 297(2) of the Companies Act 2016].

For the removal of a director pursuant to the constitution of the said private companies, so long as such removal is made pursuant to the process prescribed by the constitution, such removal is valid. 

For example, in the Low Thiam Hoe case, Darryl Goon Siew Chye J held that the removal of the plaintiffs of the 1st to 4th defendants can be validly made without the issuance of a special notice beforehand as the articles of association of the private companies do not expressly require the same. 

Conclusion

Although the company law gives a huge breathing space for companies to dictate how they are to operate (even when the process adopted by the said companies is irregular), equitable considerations such as the prohibition against the usage of corporate powers for a collateral or improper purpose can still creep into management of the said companies.