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Here are my conclusions in respect of Monica Rowling’s concerns about Paloma Choi’s directorship and employment in Kavanagh Furniture Ltd (the “Company”). My understanding of the factual situation is set out in the attached report.
Review of Research
Paloma’s removal from the board can be achieved either by her resignation, or by James, Monica and Delyth voting together as shareholders to that effect.
James may have implied authority, as managing director, to dismiss Paloma from her employment without Monica’s approval. However, James’ authority can be removed by a board decision and Monica can pass such a resolution using her casting vote.
Monica could follow the same process of obtaining a board resolution to take away Paloma’s responsibilities which involve finance or contact with the public, subject to any advice of the employment team on varying the service contract.
If Paloma is subject to a custodial sentence (as opposed to remanded in custody pending trial), it is likely that her employment will terminate and that any dismissal will be fair and lawful.
Advice
Whilst a resignation could preserve Paloma’s personal dignity and would be quicker than holding a shareholders’ meeting, Paloma may resist resigning. In order to reduce the likelihood of this happening, we could prepare a formal notice to the Company proposing Paloma’s removal (signed by James, Delyth and Monica) in order to make it clear that if Paloma refuses to resign she will be forcibly removed if the matter has to go to a vote. Faced with the prospect of being removed against her will, Paloma may then relent and tender her resignation. This would avoid the need for further formal meetings, and would mean Monica can assure her personal clients (or their parents) that the Company acted robustly in response to the allegations, and was poised to secure Paloma’s forcible removal had she not agreed to resign.
Monica should hold a board meeting to remove Paloma’s responsibility for contact with customers and financial matters. That is a crucial role for the Company, which cannot be left vacant, so Monica will need to do this herself. The board will then need to either approve a service contract for Monica or else decide how to allocate Paloma’s responsibilities.
Monica wants to prevent Paloma losing her job unless she is sentenced to a custodial sentence. As James may have implied authority to dismiss Paloma, Monica should be prepared to call a board meeting to withdraw any implied authority. This should be on a date when Delyth can attend so that Monica and Paloma can appoint her if James does not turn up. Monica should send us Paloma’s employment contract for us to check whether it contains a clause automatically terminating her employment in the event of her removal from the board.
Taking these steps to prevent James from dismissing Paloma will be complicated, and could result in creating unnecessary divisions between family members. It is also possible that Delyth will not necessarily want to be a director (even though she can resign at the end of the meeting). I therefore recommend that Monica asks James to agree to have his managing director’s powers limited so that it is absolutely clear that he cannot dismiss Paloma from her job. Monica could explain to him that this would avoid the need to find a replacement for the whole of Paloma’s work. Monica could also point out that imposition of a custodial sentence will likely result in termination of Paloma’s employment in any event, and any such termination resulting from a custodial sentence is likely to be fair and lawful, so is a lower risk strategy than instant dismissal.
To maintain the good relationship with Paloma, Monica should explain to Paloma in advance why they propose dealing with things in this way. Monica should confirm it in writing, for clarity. I recommend that we draft this letter to go from Monica to ensure that it is accurate. A formal letter from us directly to Paloma appears inappropriate in the family circumstances.
In terms of practical steps, I suggest that we do the following:
• prepare a Form TM01 for Monica to date and file immediately after the meeting; and
• show Monica the kind of formal wording used in a resignation letter to ensure that it sets out the specific date for termination required by Model Article 18(f).
I suggest we do not actually draft a full resignation letter, as that may appear unnecessarily aggressive.
If you or Monica need any further assistance do give me a call, especially if you need me to plan how to set up and run the shareholders’ meeting in the event that Paloma has to be forced off the board.
Kind regards,
Trainee
RESEARCH REPORT
REF: RO103-002/AS
CLIENT:
MATTER: Removal of Paloma Choi as a director of Kavanagh Furniture Limited
DATE: [The date on which you do the research]
ANALYSIS
Facts and Instructions
The client is Monica Rowling, a director and shareholder in Kavanagh Furniture Limited (the “Company”). Paloma Choi is also a director. Paloma may soon be convicted of fraud by false representation and sentenced to a custodial sentence. Paloma is stepmother to Monica’s children. The children are James (managing director of the Company and shareholder) and Delyth (shareholder only); both are adults. The Company has articles based on the Model Articles for a private company (“MA”).
Monica wants advice about removing Paloma from the board.
Paloma is employed by the Company and is in charge of marketing. Her contract provides for a 12 month notice period. Monica is happy for Paloma to remain employed by the Company in a capacity which does not involve finance or contact with customers – that is unless she is convicted and sentenced to a term of imprisonment, in which case Monica and Delyth want the Company to terminate Paloma’s employment at minimal cost and without notice.
James wants to dismiss Paloma immediately and Monica needs to know whether he can do this. My instructions do not explain whether James has ever been given the power to dismiss employees without reference to other directors, nor do I know the exact terms of Paloma’s employment contract.
I have taken account of Monica’s concerns about publicity, the family relationships, the amicable relationship between Monica, her children and Paloma, as well as the need to ensure continuity of the business.
I have not formally reported on the following areas:
• the likelihood of a conviction (because Paloma has separate representation);
• the potential cost/risks associated with terminating Paloma’s employment immediately or changing her role (because our employment team will deal with that). I have only covered the possibility that James could dismiss her and incur liability.
The report does not cover the following points that AS fully understands:
• the detailed procedure for running relevant meetings; and
• the fact that Paloma’s removal from the board will appear on the public record through the filing of a TM01 Form.
Legal Issues
My research report deals with the following issues:
1. How to remove Paloma from the board by way of a resolution of the shareholders or through her own resignation.
2. In what circumstances James may have the power on his own to dismiss Paloma from her employment?
3. What happens to Paloma’s employment if she is imprisoned?
CONCLUSIONS
Report into Legal Issue 1
How to remove Paloma from the board by way of a resolution of the shareholders or through her own resignation.
James, Monica and Delyth can vote together as shareholders to remove Paloma from the board or Paloma can resign.
Removal from the board requires an ordinary resolution of the shareholders (s168 Companies Act 2006, (“CA06”)). The ordinary resolution needs to be passed by simple majority (s282 CA06). James, Monica and Delyth need to vote together on both a show of hands (3:1) or a poll vote, which could be called under MA 44 (60%:40%) to achieve a simple majority and successfully pass the resolution.
James cannot implement a plan to remove Paloma without informing her because s169 CA06 requires the Company to send a copy to Paloma of the proposal to remove her, and sets out the right to speak or make written representations at the meeting of the members.
As an alternative to removal by the shareholders, MA 18(f) allows Paloma to cease to be a director if she is persuaded to resign. The resignation would be effective from the date stated in the resignation letter.
Report into Legal Issue 2
In what circumstances James may have the power on his own to dismiss Paloma from her employment?
Paloma’s employment under her service contract is a separate issue from her position on the board.
James will only be able to dismiss Paloma if he has a specific power to do so. This is because, under the MA, decisions of a company are taken by the “directors”, i.e. collectively, such as at a board meeting (MA 7) or unanimously (MA 8). The board is able to delegate powers (MA 5) but I would need to ask the client whether such delegation has been made to James.
James cannot hold a valid meeting of the directors on his own, as a quorum of two directors is required for a valid meeting (MA 11) so, in the absence of delegated authority, James would need Monica to agree at a board meeting to dismiss Paloma.
Case law suggests that James, in his capacity as a managing director, might have authority to dismiss Paloma from her job without involving the other directors. A managing director has implied authority to do all acts necessary for the conduct of a business (Hawken v Bourne). I consider that dismissing a fraudulent employee could well be included within this implied authority.
There are two legal issues that I considered when coming to this conclusion:
• Paloma’s dismissal could fall within the general authority given to a managing director. I distinguish the present situation from Smith v Butler. The Court of Appeal stated that removal of a chairman from their position as a director was not within a managing director’s implied authority. Paloma’s job is not equivalent to the high level appointment of chairman, and so can be distinguished on this point.
• It is unlikely James would have implied authority to dismiss a director by reason of a previous course of conduct by James. Even if the board has allowed James to dismiss members or employees in the past, I would argue that dismissal of employees is different to the dismissal of someone who has also been appointed as a director, such as Paloma.
In light of the above, there is a chance that James would have the power to dismiss Paloma without needing Monica and Delyth to agree. However, this risk can be eradicated. Monica could, at a board meeting, vote in favour of restricting James’ authority to dismiss Paloma. Such a resolution would be passed because James would be outvoted by Monica’s casting vote as chairman (MA 13).
Paloma would be prevented from voting because of her personal interest (MA 14), so James could prevent there being a quorum of two directors by not turning up. If so, a resolution to restrict James’ power would still be effective if:
• Monica and Paloma attend (as existing directors), accompanied by Delyth; then
• Monica and Paloma appoint Delyth to the board (with her consent) (MA 17(1)(b)) to ensure that a quorum who can count in the vote is present; and
• Monica and Delyth vote in favour of restricting James’ power.
The conclusion above is made on the basis that Paloma’s employment contract does not contain provisions which provide for termination by the managing director or automatically on removal from the board. The employment team will take this into account when advising on the risks and costs associated with early termination. It would be best to obtain clarification on this as soon as possible.

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