Our corporate law specialists note a recurring query from many clients: What is the legal distinction between a director’s resignation and their removal under the Companies Act? While both actions result in a director vacating office, understanding the distinctions and consequences is critical for boards, shareholders, and directors themselves, especially when disputes arise.
In the corporate governance sphere, the Companies Act (‘the Act) provides the legal framework that regulates the resignation and removal of directors.
Resignation
Under section 70(1)(b)(i), a person ceases to be a director when they voluntarily resign from their position. A director may tender their resignation at any time by giving written notice to the board. Notably, this is a unilateral act – it does not require a resolution by the company’s shareholders and is effective from the date of receipt or specified future date. Most often, directors resign due to conflicts of interests, poor health, retirement, or disputes with fellow board members. To ensure procedural compliance, the company must report the resignation to CIPC within 10 business days of the resignation, per section 70(6) of the Act.
While conceptually straightforward, resignation does not absolve a director from potential liability for decisions made while in office. In addition, a resignation won’t automatically extinguish a director’s fiduciary or contractual duties owed to the company.
Removal
Contrastingly, the removal of a director is a formal process primarily governed by section 71 of the Act. To that end, a director may be removed by:
- An ordinary resolution of the company’s shareholders; or
- The board in instances where a director has become incapacitated, disqualified, or ineligible, or has plainly neglected their duties.
Crucially, the affected director must be afforded reasonable notice and an opportunity to make representations before a resolution is adopted. This element of procedural fairness is constitutionally mandated – and often the basis for litigation when not followed correctly. Indeed, the removal of directors is increasingly scrutinised by our courts.
The decision to remove a director, especially when they have occupied office for a significant period of time, is not taken lightly. Generally, removal is the result of serious misconduct, loss of confidence by shareholders, breach of fiduciary duties, incapacity to act, or gross negligence.
Notably, removal does not affect any contractual rights the director has, such as employment rights. Accordingly, a removed director may claim damages if the removal constitutes a breach of contract.
In need of strategic guidance on director removals or manoeuvring governance challenges? Consult our experienced corporate law team for expert advice to safeguard your company’s interests. Contact our specialists at commercial@stbb.co.za.
This content is the property of STBB. We encourage the sharing of our content for informational purposes. However, if you wish to copy or reproduce our content on your own platform or website, please ensure that proper credit is given to STBB.
