Different laws apply, even if only one individual is involved
Most of the time, the management team of a company and the board of directors succeed in working together for the good of the organisation. They do not always agree, and the role of a board is to govern and ensure accountability. Occasionally, the relationship breaks down with a particular director or they behave in a manner incompatible with their role. In this situation you may decide to remove a director from the board. If so, it’s important to follow the correct procedure, particularly if the individual is an executive director, in other words, also an employee.
Applicable legislation
Parting ways with a director who is also an employee is rarely uncomplicated, particularly from a legal perspective, as two distinct pieces of legislation apply. Removing a director/employee from office in an unfair or unlawful manner exposes companies to liability under the Labour Relations Act as well as the Companies Act. The Labour Relations Act 66 of 1995 (LRA) guides how the employment is terminated. The Companies Act 71 of 2008 (Companies Act) guides how the director is removed from the board of directors. The overlap in the law causes uncertainty.
Directorship vs. employment
Directorship and employment fall under separate legislative provisions, which have distinct requirements and consequences. In terms of the LRA, the termination of employment (with or without notice) by an employer constitutes a dismissal. A dismissal should be substantively and procedurally fair.
The removal of a director should be for the reasons set out in the Companies Act and in accordance with its requirements. Section 71 of the Companies Act states that a director may be removed by a shareholder or board resolution if, for example, the director is incapacitated, convicted of theft or fraud, or has neglected or been derelict in their duties. The director must be given appropriate notice of the meeting to pass this resolution as well as an opportunity to make representations before the resolution is adopted. An aggrieved director may apply to court to review the decision. The court is then required to decide whether the removal was lawful and whether it complied with the requirements and procedures of the Companies Act.
Removed, not dismissed
However, the removal of a director from the board does not mean they have automatically been dismissed as an employee. The law dictates that employers must satisfy the fairness requirements outlined in the LRA to dismiss an employee.
There is a precedent for this in case law. In SA Post Office v Mampeule (2010) (LAC), the court considered a provision in the Post Office’s contract of employment that stated that the removal of a director also equates to their dismissal as an employee. The court maintained that this was not possible, as removal from the board of directors and dismissal as an employee were different processes, with different legislative requirements and consequences. The court distinguished between the requirements for the removal of a director in terms of the Companies Act and the requirements for a fair dismissal of an employee in terms of the LRA. The Post Office attempted to contract out of the remedies afforded to a director and employee in the event of their removal and/or dismissal, which the court ruled against.
A costly business
The remedies available to a director if they are unlawfully removed from the board of directors differ from those available to the same person, in their capacity as an employee, if they are unfairly dismissed. In the event of an unfair dismissal dispute, the LRA allows a successful applicant to be reinstated or be granted an order for compensation for up to 12 months’ remuneration. In the event of an unlawful removal of a director from the board, they may claim for damages equivalent to the value of the remainder of their term as a director. Both unlawful removal from the board of directors and unfair dismissal of an employee may have costly consequences for the employer, and employers need to ensure that both the LRA and Companies Act are fully adhered to before a dismissal and removal of an employee who is a director can be undertaken.
Unfairly dismissed or removed?
if you feel that you were either unfairly dismissed as an employee or removed from your position as a board director, our Cape Town attorneys can establish the circumstances of your dismissal/removal and determine if you are eligible for compensation. Contact Simon today on 086 099 5146 or email simon@sdlaw.co.za.
SD Law
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.