Directors play a critical role in a company. They make various management decisions from staffing, to finance, to the business' trading operations. Directors have a responsibility to remain aware of the company's affairs and are bound by strict legal duties to act in the company's best interests. Just as a hardworking and competent director is fundamental to a company's success, a bad one can have disastrous consequences for a company and its shareholders. Whether you are a company director looking to resign, or a director or shareholder looking to remove another director, it is crucial to understand the process for removing a director.
Shareholder Removal of a Director
Shareholders may collectively own the company of which they are shareholders. However, they do not ordinarily have much direct control over its management. This is left to the directors. However, shareholders will have ultimate control over a company due to their power to vote for the appointment and removal of directors.
If a director has committed a serious breach of their director's duties, then shareholders can bring legal action against them. For example, by failing to disclose a conflict of interest or engaging in insolvent trading, a director is in breach of their duties.
However, in practice, bringing legal action against a director can be very costly, time-consuming and stressful. Furthermore, there are various reasons why shareholders may want to remove a director, even if they have not breached their duties. Some examples include:
- poor performance;
- disagreement about the direction of the company; or
- personal conflicts.
If, for whatever reason, the shareholders want to remove a director, they have the power to do so. As a starting point, the shareholders should raise their concerns with the director and ask them to resign. If a director agrees to resign, they can give written notice to the company. At this point, the company updates its officeholder information with the Australian Securities and Investments Commission (ASIC) online.
If the director refuses to resign, then the process for removing them depends on whether the company is private or public.
If a private company has a constitution or a shareholders agreement, then these documents will set out the process for removing a director. Where there is no company constitution or shareholders agreement, the replaceable rules from the Corporations Act will apply.
If the replaceable rules apply, the company's shareholders can remove a director by an ordinary resolution. An ordinary resolution passes when it achieves a majority of the votes cast by the shareholders. Each shareholder has one vote for each share held, unless the company constitution says otherwise. For example, a shareholder within a different share class may possess different voting rights.
Note: A company must always have at least one director. So, if the shareholders seek to remove a sole director of a company, they must appoint a replacement in their place.
Board Removal of a Director
A resolution of the board can remove directors of private companies. It is essential to check the company's constitution and shareholders agreement before removing a director. There may be restrictions on this ability.
Note: A public company cannot remove a director by board resolution.
Shareholders in a public company can also remove a director by following the process set out in the company's constitution. However, despite anything written in the company's constitution, section 203D of the Corporations Act provides for the following process to remove a director.
If the shareholders of a public company want to remove a director, they must first give notice of their intention. Shareholders must make this notice to move a resolution for a director's removal at least two months before the shareholders meeting.
Shareholders must also give the director notice as soon as practicable. The director then has a right to put a case for their remaining in office. They can either give a written statement or speak to the motion at the meeting. After the motion is discussed and the director has made a case for remaining in office, the vote is held. If the shareholders reach a majority vote, they then have the power to remove the director.
Resigning as a Company Director
If you are a company director and want to resign, you must follow the set process within the constitution or shareholders agreement. Your company might not have a constitution. Or perhaps, there is nothing in the document relating to the resignation of directors. In that case, the default legal position allows you to resign as a director by simply giving written notice of your resignation to the company at its registered office.
Do Not Leave Your Company Without a Director
However, in February 2021, the federal government passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020. This Act prevents company directors from backdating their resignation or leaving a company with no directors.
It also means that you cannot remove the sole remaining director of a company with ASIC. If you attempt to do this, ASIC will reject the application and the director will remain in office.
There are three main exceptions to this rule, namely if the:
- last director dies;
- company is being wound up or under administration; or
- director never consented to be a director in the first place.
If any of the above exceptions apply, you cannot update ASIC through ASIC Connect online. Instead, you will need to either contact ASIC by phone or submit an online enquiry. ASIC will then assist you with the necessary steps.
You must also notify ASIC of a director's removal as soon as possible. If the notification is more than 28 days late, ASIC will override the effective date of their removal and replace it with the date you notified ASIC.
For example, the shareholders of ABC Constructions Pty Ltd vote to remove a director for poor performance on 1 June 2021. However, the company secretary did not update ASIC online until 15 September 2021.
If this occurs, the director can still apply to ASIC to change the resignation date by submitting an ASIC Form 502. A $42 application fee will be payable. The director must submit this application no later than 56 days after the resignation date. If more than 56 days pass, the only way to change the resignation date is to seek a Court order. Therefore, make sure you update ASIC promptly.
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 states otherwise.