Directors hold a pivotal role within a company as a person who makes various decisions across management, finance, trading and future advancements. Under such powerful responsibility, directors must act in the company’s best interests and remain bound by strict law and company duties. You can imagine how a responsible director will directly affect the company’s success, and in the alternative, how a bad director can cause the downfall of the same company.
In some circumstances, the only way to secure the best interests of the company is for the director to resign, retire or in extreme cases, be removed. In any process, it is important that the company and former director follow the appropriate formalities to ensure company records are kept current and applicable. Please remember that when a director resigns, retires or is removed from an Australian company, many of their legal obligations and requirements cease. That being said, a former director may still be liable for previous conduct under their former obligations and requirements so it is important that records of any changeover are kept correctly. This Legal Kitz blog will run you through a selection of these processes so that when it is time for a change, your company can remove the director correctly and swiftly!
What happens when shareholders want to remove a director?
Shareholders hold important ownership roles through their financial contributions to a company. With that in mind, they still do not have direct control over the management, as this is left to the director. With this power separation, a shareholder or group of shareholders may not agree with the unforeseeable conduct of the director. To protect the interests of shareholders and the longevity of a company, shareholders can use their power to vote for the removal of directors – causing harm to a company. Various reasons for a shareholder wanting to remove the director can include poor performance, core disagreements about the direction of the company or serious personal conflicts.
In many circumstances, a director may also be liable for committing a serious breach of their director duties. These are fiduciary and statutory duties imposed on them by the Corporations Act 2001, or other obligations which arise from court decisions, company constitutions and field regulations. Some examples of breaches include improperly using information, failing to avoid conflicts of interest, not keeping financial records on the company and engaging in insolvent trading. If a director commits a serious breach, then shareholders have the right to bring legal action against them. Please consider that in practice, bringing legal action against a director can be costly, time-consuming and stressful.
Under any of these circumstances, a good point to start is by raising shareholder concerns with the director and formally asking for them to resign. If a director agrees to resign, they should give that written notice to the company. Once an agreement to resign is reached and communicated in writing, the company should move forward by updating its officeholder information online under the Australian Securities and Investments Commission (ASIC). Alternatively, if a company director refuses to resign despite a serious form of misconduct or complication, a process of removal should begin following the processes for private and public companies.
How do I remove a director from a private company?
How a director resigns will depend on how the company is governed. This means considering whether the company has its own shareholders agreement, constitution, if it has adopted the replaceable rules under the Corporations Act 2001, or in some circumstances, whether a combination of these things apply.
If your company has written agreements and constitutions, then it must keep a copy as part of the company records. These documents will set out the processes for removing a director and should be followed accordingly. Alternatively, the basic set of replaceable rules for managing your company will apply if a company doesn’t have these in place. Under the replaceable rules, the company shareholders can remove a director by ordinary resolution. An ordinary resolution is the agreement of just over half, 51%, of the directors and shareholders present at the board meeting. Each person voting will have one vote per share that they hold, unless any existing agreements or constitutions state otherwise.
This can similarly be achieved by the entire board, but again, it is important to check the company’s constitution and shareholders agreement before removing a director as there may be restrictions on this ability. Please note that if a company only has one director who the shareholders or board are seeking to remove, then the majority must appoint a replacement ready for if such removal is achieved.
How do I remove a director from a public company?
If a public company has a company constitution which sets out the process for removing a director, shareholders are welcome to follow this process. However, regardless of this option, section 203D of the Corporations Act 2001 provides a process for the removal of a director which may also be followed.
This process begins with a shareholder giving notice of their intention to remove a director. This is a notice to move a resolution for a director’s removal and it should be made at least two months before a shareholders meeting, to form a resolution and as soon as practicable. The director then has the right to respond and put a case forward in support of them remaining in office. This can be done through a written statement or a speech to the motion at the shareholders meeting. At this meeting, the motion is to be formally discussed with all arguments raised and then, similarly to the last processes, a vote is held. If the shareholders wishing to remove the director reach a majority vote of 51% or more, then they have the power to remove a director.
What happens when there’s a resignation of a director?
As aforementioned, a director will always have the option to formally resign. Again this must follow any set process under your company agreements or constitution. If no set process is available, the default legal process is, as mentioned, formally writing a letter of resignation and updating the officeholder information online under the ASIC.
How can I prepare for the future?
This blog mentioned the importance of having a new director ready before the former director is removed or resigns. This strict requirement was passed in February 2021, by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, as company directors are now prevented from backdating their resignation or leaving a company with no directors. This incudes not being able to remove the sole remaining director of a company with ASIC when no replacement is formally ready. If you attempt to do this, ASIC will reject the application and the former director will remain in office despite any meeting or majority vote.
Please note that three main exceptions to this rule exist which include if the:
- last director passes away;
- company is being wound up or under administration; or
- director initially never consented to being a director.
If any of the above exceptions apply, you cannot update ASIC through ASIC Connect online and you will need to contact ASIC by phone or submit an online enquiry. Any notification of a director’s removal must be done as soon as possible. Please note that if you are more than 28 days late, ASIC will override the effective date of their removal and replace it with the date you notified them.
But do not stress! A director can still apply to change the resignation date by submitting an ASIC Form 502 and usually a $42 application fee will apply. In the worst-case scenario, please make sure to submit this application no later than 56 days after the resignation date. If more than 56 days pass, the only way to change the director’s resignation date is to seek a court order which, as said, can be costly, stressful and time consuming. You may think that these dates are not important, but having up to date and correct transfers records of directors is important if a previous director falls liable for conduct under a transfer period. Having an incorrect record will make it hard to show that misconduct is the result of the former director, so please make sure you update ASIC promptly.
Legal advice
If shareholders of a company wish to remove the company director, the process for doing so will vary depending on whether the company is private or public. In both cases, a majority vote of 51% or more will be sufficient to approve a director’s removal. However, this will not be the case for private companies if their constitution or shareholder agreement states otherwise. If you require assistance in a process of removing a director, you should seek legal advice. Legal Kitz can ensure that your matter is handled appropriately and in a legally compliant way so that you dont run into trouble with the ASIC! Click here to book a FREE consultation with one of our highly experienced solicitors today, or contact us at [email protected] or by calling 1300 988 954.