The rules regulating a company are contained within the Corporations Act 2001 (Cth), the constitution that may be adopted to govern the operations of the company and a shareholders agreement.
The importance of consistency between all of 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 [2017] FCA 1451.
The facts
Mr Shearwood and Mr Peters were co-directors of Allied Resource Partners Pty Ltd (‘Allied’) which had in place both a constitution (‘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 removed him as director and appointed another.
Mr Shearwood challenged his removal and the Federal Court upheld the challenge on the basis that Mr Peters’ actions were ‘invalid and ineffectual’.
The Court’s reasoning
The Court 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.
Mr Shearwood had not been appointed by a shareholder as provided in the Agreement. Rather, he had been 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 be achieved through the operation of clause 15.3.1(b) of the Agreement alone. It had to be considered by examining the Corporations Act, the Constitution and the entirety of the Agreement which, when correctly construed, required a 70% shareholder approval for the removal of a defaulting director.
Conclusion
The process for appointing and removing directors is governed by the company’s constitution, shareholders agreement 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.