A guide to removing directors

Directors properly performing their duties and acting in the company’s interests are essential requirements for effective corporate governance.    At times, directors may not meet the standards expected of them, or they might conflict with other directors or shareholders on the best way to act.  Sometimes a director not acting appropriately will agree to resign, but they may also be disqualified and in some circumstances, removed by shareholders.

Resignation and disqualification

To resign, a director simply needs to give notice to the company and then they or the company must notify ASIC.  When a director is causing issues, discussing their resignation with them may save time and conflict later.

ASIC or the Court may disqualify directors from managing corporations where they:

  • are responsible for multiple insolvencies;
  • contravene civil penalty provisions of the Corporations Act;
  • repeatedly contravene the Corporations Act; or
  • commit certain offences outlined in the Corporations Act which generally relate to mismanagement of the company.

Removal in proprietary companies 

Removal of directors in a proprietary company (i.e. Pty Ltd company) is tied to what is in the company’s constitution.  If the constitution follows the replaceable rules set out in the Corporations Act, specifically section 203C, then it will allow directors to be removed by an ordinary resolution of shareholders.  Alternatively, the constitution may prescribe some other rules relating to the removal or retirement of directors.

Removal in public companies

The process for removing directors of public companies (including companies limited by guarantee and listed companies) is far more rigorous.  Directors can be removed under section 203D of the Corporations Act by an ordinary resolution of shareholders.  Any removal resolution by directors will be void.   Section 203D operates despite anything within the company’s constitution, or any agreements that have been made between the director and the company or the company’s members.  Further, no misconduct or other justification is required to remove the director.

Section 203D prescribes the following steps:

  1. Shareholders must give the company at least 2 months’ notice before the meeting of their intention to move the resolution to remove the director.
  2. The director must be given notice of the resolution as soon as practicable.
  3. The director must be given the opportunity to address the resolution at the meeting and they may issue a statement before the meeting to be circulated to the members.
  4. The company must issue notice of the meeting to members.  This must be a minimum of 21 days before the meeting for a public company and 28 days for a listed company.

Who calls the meeting?

Directors cannot simply refuse to call a meeting to pass a removal resolution.  If shareholders holding at least 5% of the votes in the company request a meeting to consider a removal resolution, then the directors are obligated to call and arrange to hold it at the company’s expense.  Alternatively, shareholders holding at least 5% of the votes in the company may call and arrange to hold a meeting at their own expense without making a request to the directors.

Must public companies comply with section 203D?

Shareholders in public companies can remove directors by a method outlined in their constitution.  Section 203D simply acts as a catch-all provision to ensure that companies have an avenue to remove directors where there is no method in the constitution or where it is not appropriate in the circumstances.  However, public companies should follow the procedure in section 203D to avoid the risk of unfair dismissal claims.

Conclusion

Removal of directors is not always the easiest process but it is sometimes necessary to protect the company’s interests.  The most important thing for shareholders and directors to remember when trying to remove a director, is that they are dealing with a person, and so there is always the potential for conflict.  It is worth considering which path will be that of least resistance, whether it be shareholders resolving to remove them, applying to ASIC or discussing the issues with the director.  Making records of concerns and the process is a simple way to protect against risk and maintain transparency.

If you have any queries or would like further information regarding this article, please contact:

Rod Gillam
Partner
M: 0411 698 687
E: rgillam@pageseager.com.au

Grace Williams
Lawyer
T: (03) 6235 5174
E: gwilliams@pageseager.com.au

Published: 13 December 2016

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