Is it legal for a director to stop another director’s salary?

Question from Fifi, Is it legal for a director to stop another director’s salary?

Answer from AI:

In the UK, the actions of company directors are governed by the Companies Act 2006 and other relevant regulations. Directors have a duty to act in the best interests of the company and its shareholders. However, unilateral decisions, especially those affecting salaries and dividends, can raise legal concerns.

Understanding Directors’ Duties and Powers

Directors must adhere to several key duties under the Companies Act 2006, including:

• Duty to act within powers (Section 171): Directors must act according to the company’s constitution and only exercise their powers for the purposes for which they were conferred.
• Duty to promote the success of the company (Section 172): Directors must act in a way they consider, in good faith, would most likely promote the success of the company for the benefit of its members as a whole.
• Duty to exercise independent judgment (Section 173): Directors must make their own decisions and not simply follow the will of others.
• Duty to avoid conflicts of interest (Section 175): Directors must avoid situations where they have, or could have, a direct or indirect interest that conflicts with the interests of the company.

Stopping Salaries and Dividends

Unilateral decisions by a director to stop another director’s salary or dividends without a board meeting or proper discussion can be problematic. Here are some key points to consider:

1. Board Meetings and Resolutions: Major decisions, such as stopping salaries or dividends, typically require a board meeting and a resolution passed by a majority of the directors. If your uncle is making these decisions without consulting the board, he may be acting outside his powers.
2. Shareholder Agreements: If there is a shareholder agreement in place, it may outline specific procedures for making decisions about salaries and dividends. Violating these procedures could be a breach of contract.
3. Fiduciary Duties: Directors have fiduciary duties to act in the best interests of the company and its shareholders. If your uncle’s actions are not in the best interests of the company or are self-serving, he may be breaching these duties.

Steps to Take

If you believe your uncle is acting improperly, consider the following steps:

1. Request a Board Meeting: Formally request a board meeting to discuss the issues. Ensure that all directors are present and that minutes are taken.
2. Review the Company’s Articles of Association: Check the company’s articles of association and any shareholder agreements for specific procedures related to decision-making and director conduct.
3. Seek Legal Advice: Consult with a legal professional who specializes in company law. They can provide personalized advice based on the specifics of your situation.
4. Consider Mediation: If internal discussions are unproductive, mediation can be a way to resolve disputes without going to court.
5. Legal Action: As a last resort, you may need to consider legal action. This could involve seeking an injunction to prevent further unilateral decisions or pursuing a claim for breach of fiduciary duty.

Resources

For more information, you can refer to the following resources:

• Companies Act 2006
• Directors’ Responsibilities

When to Seek Legal Advice

Given the complexity of company law and the potential for significant financial and legal consequences, it is crucial to seek legal advice tailored to your specific circumstances. A solicitor with expertise in company law can help you navigate the situation and protect your and your mother’s interests.