When forming a company, certain documents are prepared which will be pivotal to its existence. Once registered, the replaceable rules contained in the Corporations Act 2001 (Cth) may be adopted or a constitution specially prepared to govern the operations of the company.
A shareholders agreement may also be used which creates a private contract between the shareholders of the company and sets out their respective rights and responsibilities.
The importance of consistency between these documents, and understanding the interplay of the Corporations Act, when managing the company is critical.
The issues arising from conflicting documents and unfamiliarity with the processes required to appoint and remove company directors, was evident in Shearwood (Trustee) In the matter of Allied Resource Partners Pty Ltd v Allied Resource Partners Pty Ltd  FCA 1451.
Mr Shearwood and Mr Peters were co-directors of Allied Resource Partners Pty Ltd (‘Allied’) which had in place the Allied Constitution and a Shareholders Agreement (the ‘Agreement’).
Believing that Mr Shearwood had breached certain provisions of the Agreement, Mr Peters served a default notice which, according to his interpretation of the Agreement, provided that Mr Shearwood’s position as director would automatically cease if he did nothing to remedy the alleged breaches within ten days.
Mr Shearwood failed to respond to the notice and Mr Peters purportedly removed him as director and appointed another.
The relevant clause 15.3.1(b) (albeit clumsily worded) provided that when a default notice is served ‘...each director, including themselves, appointed by the defaulting shareholder is automatically removed’.
Mr Shearwood challenged his removal and the appointment of the alternate director.
The Federal Court upheld the challenge and determined that Mr Peters’ actions were ‘beyond power, invalid and ineffectual’.
The Court declared that Mr Shearwood was, at all times, and remains a director since his initial appointment and ordered that Allied take the necessary steps to re-record him as director and remove the purported appointment of the alternate director.
The Court’s reasoning
During submissions, it became apparent that neither party had considered the method by which Mr Shearwood had initially been appointed director. This was relevant in that it would assist in determining how he should, or could, be removed.
On the facts, Mr Shearwood had not been appointed by a ‘defaulting shareholder’ as provided in the Agreement, which incidentally was signed two days after the company’s incorporation. Rather, he was appointed upon registration of the company pursuant to s 120(1) of the Corporations Act, which provides:
‘A person becomes a member, director or company secretary of a company on registration if the person is specified in the application with their consent as a proposed member, director or company secretary of the company’.
Consequently, the removal of Mr Shearwood as director could not ‘automatically’ be achieved through the operation of clause 15.3.1(b) of the Agreement alone. It should be considered by examining the Corporations Act, the Allied Constitution and the entirety of the Shareholders Agreement which, when correctly construed, required a 70% shareholder approval for the removal of a defaulting director.
Further, although the Agreement provided for an initial period of directorship of three years (which term Mr Shearwood had exceeded) the Court found that something more would be required to remove a director exceeding three years which, in this case, had not occurred. Indeed, Mr Peters’ directorship itself had exceeded three years.
Despite significant allegations of reckless behaviour and evidence pointing to Mr Shearwood’s conduct to the detriment of Allied, his position as director ensued. This was also despite the intended effect of the Shareholder Agreement to ‘ensure that shareholders act with loyalty towards’ the company, particularly those shareholders who were also officeholders of the company.
The process for appointing and removing directors is governed by the company’s constitution, shareholders agreement (if one exists) and any other legal documents affecting the operations of the company. The requirements of the Corporations Act must also be considered so there is consistency and clarity with respect to the necessary processes when conducting the company’s affairs.
Significant, and often controversial, events such as the removal of a company officer, should be carried out with due process (usually the passing of a resolution by a majority of shareholders) and not the arbitrary decision of a company’s officer/s. Failure to act within the boundaries of the Corporations Act and the company’s governing documents may find such action improper and unjust, despite the preceding events that trigger such action.
When registering a company, obtaining appropriate legal advice should ensure that key documents are clear, consistent and do not conflict with provisions of the Corporations Act.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9238 0060 or email firstname.lastname@example.org.