Third Dimension: How to Legally Remove a Director/Committee Member

February, 2014

There are many reasons why you may consider removing a Director/Committee Member from your Board/Committee.  In practice, however, removing a Director/Committee Member from the Board/Committee can be difficult and there are certain procedural steps that must be followed to ensure the process is fair and proper.  You must follow these steps so that the Director/Committee Member does not challenge their removal.

We will firstly consider the procedure for the removal of a Director of a Company.  We will then consider the procedure for the removal of a Committee Member of an Association.

A.    Procedure to remove a Director of a Company

What does ‘removing a Director’ mean?

Removing a Director means that a person will no longer be a Director and will not be able to enjoy the benefits of being a Director. They will also stop having to perform and observe their Director’s duties.

What does the law say?  

Section 203D of Corporations Act 2001 (Clth) (Act) provides that a public company may by ordinary resolution remove a director before their period of office ends.  This is a statutory right, conferred upon the company acting in general meeting.  It applies despite anything in your company’s constitution or any agreement between the company and the Director.  However, a Director’s contract of service may entitle him or her to compensation if he or she is removed from office prematurely.

Situations where a Director can be removed

The only manner in which a Director can be removed from office is if the Director:

(i)      is no longer eligible to be a Director (e.g. the Constitution requires a Director to be a member and the Director ceases to be a member);

(ii)     is removed due to a breach of the Act;

(iii)    is removed by the members pursuant to the Act; or

(iv)    one of the events noted in your Constitution occurs (this is dependent on the clauses in your Constitution).

We will focus on the procedure relevant to point (iii) which is the removal of a Director by resolution in a general meeting.

Please note it is illegal for a board to remove a Director.

Procedure to remove a Company Director

(a)   Notice of intention

The members have to issue the company with notice of intention to move the resolution to remove the Director.  The company must be given at least two (2) months notice before the meeting is held.  This timeframe can be shortened, as explained below.

The law does not specify how many members need to issue the notice.  A suggestion would be:

(i)      members with at least 5% of the votes that may be cast at the general meeting; or

(ii)     at least 100 members who are entitled to vote at the meeting.

(b)   Notice requirements

Following receipt of the notice by the company, the company has to convene the meeting.  The company can hold the meeting in less than two (2) months, so long as the notice for the meeting is issued after the company receives the notice from the members.

The company needs to give at least 21 days notice of a meeting of the members of a public company at which a resolution will be moved to:

(i)     remove a Director under section 203D; and

(ii)    appoint a Director in place of a Director removed (although this is optional).

The company must provide the Director with a copy of the notice as soon as practicable after it is received.

(c)   Do you need a reason to remove a Director?

Generally there is no requirement to provide reasons to remove a Director of a public company under section 203D of the Act, as a Director’s position is at the behest of the members.  Further, it does not appear that a removal of a board member has to be justified or be the result of certain causes or events.

There have been circumstances where the Courts have regarded the removal of a Director as oppressive or unjust within section 232 of the Act, although this can be avoided by following the correct procedure to remove a Director.

(d)   Director’s rights

The Director is then permitted to:

At the meeting, it only has to be an ordinary resolution to remove the Director.

(e)   Following the removal of the Director

The vacancy resulting from the removal of a Director by resolution in the fashion set out above, if not filled at the meeting (the members can appoint someone else to fill the vacancy by ordinary resolution), may be filled as a casual vacancy if this is permitted by your company’s Constitution.

(f)    Procedural Irregularities

Generally, an irregularity in the procedure set out above does not invalidate the removal of the Director, unless the Court is of the opinion that the irregularity causes ‘substantial injustice’ that cannot be remedied and declares the procedure to be invalid.

(g)   Consequences of Contravention of section 203D

Contravention of section 203D is an offence punishable by a fine of five penalty units, which is equivalent to $550.

An offence based on section 203D is an offence of strict liability.  This means that there is no defence to this offence.

B.    Procedure to remove an Association Committee Member

You need to check your organisation’s rules to find out the procedure (if any) for removing the Committee Member.  It is not compulsory for incorporated associations to have rules for the removal of a committee member, but if your rules are silent on this issue, the model rules provision will automatically apply.[1]

If your organisation uses the model rules, the procedure will generally be as follows:

  1. There will need to be a general meeting of the members of the association to remove the Committee Member.  It can be a ‘special’ general meeting or an annual general meeting.  Usually, a general meeting to remove a committee member would be a special general meeting.
  2. The members of the organisation will need to vote on a proposed ‘resolution’ to remove the Committee Member.
  3. Your organisation’s rules may have specific ‘natural justice’ requirements to give the Committee Member a chance to put their side of the story to the members.  If your organisation uses the model rules, the Committee Member who is the subject of a proposed resolution for removal may generally:
    1. make written submissions regarding why they think they should keep their position as a member of the committee;
    2. give this document to the secretary or president; and
    3. request that it be provided to the members of the organisation.
  4. The secretary may then provide a copy to each member, or if this does not happen, the Committee Member may require that it be read out at the meeting[2].

Please refer to the schedule below which identifies the applicable legislation for each state.

Remember that the removal of a Director/Committee Member from the Board/Committee is different from removing them from the Director/Committee Member from the organisation entirely.  If the Director/Committee Member is also a Member of the organisation, their removal from the Board/Committee will generally not affect their status as a Member of the organisation.

This article originally appeared in Third Dimension – Summer 2014

Contact Mills Oakley

For more information, please contact:

vera-visevic-mills-oakley

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

 


 

[1] http://www.pilch.org.au/Assets/Files/Removing%20a%20committee%20member%20from%20the%20committee.pdf
[2] http://www.pilch.org.au/Assets/Files/Removing%20a%20committee%20member%20from%20the%20committee.pdf

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