How does a company remove its only director?

Case scenario:  Person A is the sole director of an Australian company that is fully owned by person B, a foreigner. The Australian company has cash in a bank account accessed by A as sole director. B trusted A initially, but now B discovers that A has taken the company’s money without approval and wants to remove A as a director as soon as possible.

 

1. Process to remove

First, B should find an alternative person to be the director (person C). Australian companies require at least one director that is a person over 18 (companies cannot be a director in Australia) and that the person is resident in Australia. B will need to ask C to consent to be a director and provide some personal details to be appointed.

Next, if time allows, review:

  • the company’s constitution and see if there are any unusual rules governing the removal and appointment of directors; and then
  • any employment or engagement agreement between A and the company.

If nothing untoward, or B’s priority is to urgently remove A notwithstanding any problematic consequence anyway, then proceed to next steps.

Next, person B as shareholder resolves to appoint C and remove A. That should be done in writing. Then register that on the ASIC records electronically. From B deciding to implement, to registration, can take as little as a few hours.

Next, the updated ASIC records should then be given to the company’s bank to remove A as an authorised signatory of the bank accounts. The bank should then prevent A accessing the company’s accounts.

 

2. Related issues

Practical concerns – if A has property that needs to be returned, like a vehicle, laptop and company documents, then maybe it is best to secure that property beforehand.

Recovery – the company may have an action against A for return of the money plus damages. Directors have civil obligations to act in the best interests of the company so if A breached those duties, the company can sue for the money that was taken plus damages.

Crime – B may report A’s actions to the police if the taking of money was actually theft.

Loan guarantees – if A has given personal guarantees for loans to the company, then removal of A as a director may be default under those loans. Prior warning and agreement with the lenders not to call up the loans may be relevant and appropriate.

Employment law – if A was an employee then the immediate removal may constitute unfair dismissal or other breach of A’s employment rights. Also need to consider if A’s taking of monies may be ‘serious misconduct’ which allows the company to terminate the employment immediately. Then consider what entitlements may be owed to A.

Defamation – A could successfully sue B and the company if A has been defamed and none of the defences apply. The action to remove

 

3. What if Person C as a replacement director cannot be appointed quickly

The administrative dilemma here is that a director needs to sign the ASIC registration form to remove A. If C cannot be appointed yet, and presuming A will not sign or B does not want to alert him to the removal, then the company could appoint person B. The problem there is that if B is a non-resident, then the company is in breach of the law that requires at least one resident director.

Optimally, a replacement resident director is appointed, perhaps only for a short time until a longer term solution is found. Depending on the exact circumstances though, it may be the only choice that B becomes the director to sign the forms to remove A and then register that with the ASIC. The fact that the company is in breach of the Corporations Act obligations to have a resident director will not invalidate the resolution of the company to remove A as a director. However, best practice is to appoint a resident director prior to removing A.

 

For questions relating to the appointment, removal and rights of directors and shareholders, please contact DW Legal on 07) 5503 1711.

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