Removal of officers & payments for loss of office

Removal of Directors

In Singapore and even in other countries, it comes a time when directors have differences in opinion. In most cases, such disputes may lead to the removal of a director from office. If their terms have not expired, the company constitution should be used to execute their dismissal accordingly.

However, this is not required by law and such regulations may be omitted from a company’s constitution.

In such a situation, the directors may only be removed pursuant to the Companies Act which is discussed later in the chapter.

If any of your directors are terminated wrongfully, your company may have to pay them for damages as per the provisions of their service contract.

For executive directors, terminating them is more complicated because they function as executives as well as directors. While the 2 positions are often tied, the contracts are treated separately. Dismissing your executive director from office does not automatically impact on his/her position and vice versa.

Removal of Private Companies Directors

If you are running a private company, it is important to know that you can dismiss your directors by ordinary resolution before their contracts expire provided that your company has no other agreement with them.

However, the constitution of your company dictates the terms and limits. For example, some constitutions may limit the number of years it would take before a director can be removed from office (mostly 1 year) even if the majority of members approve it.

In addition, in a private company, the constitution dictates whether a director can be removed before his/her contract expires. In contract to a public company, the constitution of a private company may allow directors to remove another director.

Removal of Public Companies Directors

In a public company, it is important to know that you can dismiss directors by ordinary resolution before their contracts expire provided that the company has no other agreement with them.

In other words, even with an employment contract still in effect for a specified number of years, members can use an ordinary resolution to remove the director. Even so, du to breach of contract, the directors may still have the right to be compensated for damages.

In accordance with Section 152 of the Companies Act, in public companies, the dismissal of a director can only be done by its members (i.e. members of public companies thus retain the power to remove directors). Nonetheless, if the director in question only represented the interests of a certain class of shareholders, their removal takes effect as soon as their replacement has been hired. In addition, certain procedural requirements must be complied with.

Members of public companies wishing to remove a director have to comply with the following procedure:

Special notice of the resolution must be given at least 28 days prior to the meeting that the resolution is made.
Special notice notifying the director of the resolution to remove him/her must be given by the company.
The director has the right to send representatives to speak at the meeting.

In accordance with Section 152(8) of the Companies Act, public companies are prohibited to use their own directors to remove another director before the expiry of their contracts. Thus, the only way is to use company members to approve such removals in a meeting.

Special Notice of Resolution

While Section 152(2) of the Companies Act provides that removing a director requires a special notice of the resolution, Section 152(8) provides that Section 152 of the Companies Act co-exists with any other powers that exists except for the section.

Hence, where your constitution allows the director’s removal by company members subject to procedures unlike in Section 152, he/she may be removed in accordance with the constitution rather than s 152.

For example, a company will not need to give special notice as per Section 152(2) of the Companies Act if the constitution provides for an independent right of removal without the requirement to give special notice.

Right of Director to be Heard

It is important to know that removing your director from office is not a swift move because they have the right to defend themselves. They can do this by being heard at the meeting as well as making written representations to the company.

In addition, the director on the chopping block can request the company to notify members of the company of his/her representations. Pursuant to such request, the notice of resolution sent to members must be detailed with the fact of his/her representations and a copy sent to all company members. If some members do not receive the copies, the director has the right to read the fact of his/her representations orally at the meeting.

Nevertheless, some conditions are appended to the directors’ right to be heard. They are restricted from using their rights to defame your company publicly, and you may go to court to stop them from being heard at the meeting. Furthermore, proceedings under the constitution may deny them the legal right to be heard as such right only arises when the procedure under Section 152 of the Companies Act is used.

Compliance with Procedures

Regardless of whether the director is being removed as per the constitutional provisions or under Section 152 of the Companies Act, the proper procedure must be followed.

An example is the Malaysian case of Solaiappan & Ors v Lim Yoke Fan & Ors. According to the company’s constitutional documents:

A director might be removed; and
A general meeting could only be help after giving a 7-days’ notice.

The plaintiffs sought after removing all the company directors but sent the notice of a resolution to that effect only 3 days before the meeting. The plaintiffs allegedly replaced the defendants as directors in a meeting. The plaintiffs brought an action when the defendants refused to relinquish office. The Malaysian court held that Section 128 of the Companies Act 1965 (Malaysia) (which is the Singapore equivalent of Section 152 of the Companies Act) was not mandatory.

From the abovementioned case, the power that allowed members to remove directors co-existed with the one in the constitution. For that reason, the provision of 28 days’ notice before removing a director was not necessary because it did not adhere to the constitutional provisions for a shorter notice. On the other hand, since the plaintiffs also did not give proper notice required under the constitution, the courts held that the defendants were not properly removed.

As a result, both the plaintiffs and the defendants were dismissed as improperly elected company directors.

Resignation by Director

In Singapore, company directors are not allowed to leave their office vacant or even resign unless at least 1 Singaporean resident exists as the remaining director. If any of your directors wants to resign without adhering this provision, his actions will be considered invalid.

Apart from the above restriction and subject to the provisions of the constitution, a company director is allowed to resign through a written notice.

Under Section145(4B) of the Companies Act, the sirector may vacate his/her office whwther the compnay accepts or rejects his resignation. Resignation constitutes a change in appointment and has to be filed with ACRA.

Prohibition from Compensating for Loss of Office

If your company director vacates his/her office, your company is prohibited from making any compensation to him/her even if the loss of office is associated with his/her retirement.

A “director” includes any individual who has served as your company director or of a corporation considered to be your company’s subsidiary. Any payment made in breach of this prohibition results in the director holding such payment in trust for the company.

According to Section 168(1) of the Companies Act:

Compensation for loss of office as an officer and not as director (unlike the equivalent English, Australian and New Zealand sections), must be disclosed and approved at a general meeting
Payment to a director as compensation for loss of office as an officer (not necessarily as a director) must be disclosed and approved at a general meeting.

Hence, where your company director no longer serves as the CEO or managing director but is still a director, any payment must be disclosed and approved at a the general meeting. This rule protect your company from paying exorbitant amounts of money to directors removed from office.

Exceptions to the prohibition

There are exceptions when it comes to paying a director after his/her removal from office or if his/her removal is associated with retirement. These exceptions take place if:

the particulars of the offered payment, along with the amount in question, is revealed to company members and is approved at a general meeting;
the payment is made as per any agreement before 1 January 1967;
the payment is made as per any agreement disclosed and approved by special resolution;
the payment is a bona fide for damages for breach of contract;
the payment is a bona fide for pension or lump sum payment for past services to the company but the payment must not exceed the total emoluments of the director in the 3 years immediately before his/her retirement or death; and
the payment is made under an agreement before the director was appointed to the company.

Removal of Company Secretary

The Companies Act does not expressly confer any power on the directors to dismiss the company secretary. The constitution of a company usually provides that the secretary may be removed by the directors.

The secretary may, therefore, be dismissed by a Board resolution. If the company secretary is employed full-time by the company, a service agreement would typically be executed between the company and the secretary, containing various terms and conditions of the secretary’s engagement. This may specify such terms as the duration of the appointment and the length of notice to be given by either side for the termination of the agreement.

Certain grounds could justify dismissal notwithstanding that the engagement has not run its full term.

These grounds include:

Fraud or gross misconduct such as dishonesty;
The giving of fraudulent information to obtain appointment;
The taking of secret commission, profit, benefit or bribe;
Disclosure of confidential company information;
Physical incapacity prohibiting proper attention to duties; and/or
Negligence towards duties to such an extent as to prejudice the company’s business.

Resignation of Company Secretary

If your company secretary want to resign, he/she must give notice by writing a letter of resignation to the company.

As soon as the Board received the letter, they have to appoint another qualified individual as a replacement and update the register of secretaries through filing with ACRA.

As aforementioned, the office of secretary must not be left vacant for more than 6 months at any one time, thus the appointment of a new secretary is time-sensitive.

Compensation to Company Secretary for Loss of Office

There is no general prohibition against a company making payment to a company secretary as compensation for loss of office. A company may compensate its company secretary for loss of office.

Such compensation can be made in accordance with the company secretary’s employment agreement or ex gratia.

Removal of CEO

Since the CEO reports directly to the Board, the process of his/her removal starts with the company’s shareholders holding a general meeting to decide whether to vote on his/her removal or to pass a resolution.

On the other hand, if the constitution of your company has a clause governing the removal of CEOs, you can use it in certain situations, e.g. in the event of immoral conduct or terminal illness.

Resignation of CEO

Before a CEO resigns, it is important to notify all the company shareholders about the move first, which prevents speculation that may lead to low productivity and morale.

The resignation of your company CEO must be effective as of the date the Board receives the letter of resignation, which validates that he/she has relinquished the position and is no longer having any direct or indirect subsidiary dealings with your company.

Compensation to CEO for Loss of Office

There is no general prohibition against a company making payment to a CEO as compensation for loss of office. A company may compensate its CEO for loss of office.

Such compensation can be made in accordance with the CEOs employment agreement or employment contract.

Conclusion

If you need guidance on matters concerning the removal of officers and payments for loss of office, contact our experts at Tianlong Services today and we will offer expert guidance to ensure your company remains in compliance with Singapore law as it grows and expands. Contact us today for a free consultation.