What Happens When a Director Leaves Your Company?

In Short

• A director can leave a company by resigning or being removed.
• The company must notify the Australian Securities and Investments Commission (ASIC) of the director’s departure within 28 days.
• If the departing director is the sole director, a replacement must be appointed to comply with legal requirements.

Tips for Businesses

Ensure that director departures are documented in writing and promptly reported to ASIC. Review your company’s constitution or the Corporations Act 2001 (Cth) to follow the correct procedures. If the departing director is the sole director, appoint a new director immediately to maintain compliance.

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Table of Contents

• Director Resignation
• Director Removal
• Notification Requirements
• Assessing and Redistributing Director Responsibilities
• Other Considerations
• Key Takeaways
• Frequently Asked Questions

It can be a stressful period when a director suddenly leaves your company. But rest assured, there is no need to panic. Instead, consider whether a director has resigned or if the company board or shareholders have removed a director. In each case, there is a particular process you should follow to ensure your company can smoothly carry on with its operations. This article will outline these considerations and step through the processes to follow when a director leaves your company. 

Director Resignation

A company director can resign from their position at any time. When a director resigns, many of their legal obligations cease and they are no longer bound by their directors’ duties. The process for director resignation is relatively straightforward, and either the replaceable rules of the Corporations Act 2001 or your company constitution will govern the process. 

Generally, when a company director wants to resign from their position, they will need to give the company written notice of their resignation. The resigning director will usually sign, date and deliver a director resignation letter to the company’s registered office. This letter formally notifies the company that they are stepping down. Following this, your company will need to notify the Australian Securities and Investments Commission (ASIC) of the resignation. 

Director Removal

Alternatively, a director may leave your company if removed by the company members. The replaceable rules of the Corporations Act or your company constitution will contain the process for removal.

Usually, a proprietary company may remove a director from the company by passing a resolution at a members’ or board meeting. Following this removal, the company may appoint another person as a director in their place by resolution.

If the company’s constitution allows it, a majority of directors may remove a director. In this circumstance, you need to be careful and consider whether the director is an executive director or under an employment agreement. If a majority of directors dismiss another director and end their employment, this may trigger unfair dismissal laws. Likewise, your company may be open to an employment dispute. 

Notification Requirements

When a director leaves your company, there are a few notification requirements that you should follow.

If a director leaves the company through resignation, you should follow this process:

1. The resigning director should notify the company at their registered address.
2. Next, the company must directly notify ASIC of the director’s resignation. You can complete this notification through your online ASIC account. And update ASIC records within 28 days of the resignation.
3. Ensure there is someone to replace the resigning director. If a resigning director leaves your company without a director, ASIC will reject your lodgement of a director resignation. The exception is if you are winding up the company. 

If the company removes a director, you should generally follow the following process:

1. The appropriate resolution must be passed to remove a director by its company members or board. You must document and retain these resolutions within company records.
2. Next, the company must notify ASIC of the director removal.
3. If another person is replacing the director, the company must pass another resolution.
4. Following this resolution, the company must notify ASIC of the new director appointment.

Assessing and Redistributing Director Responsibilities

When a director leaves your company, it is crucial to conduct a thorough assessment of their responsibilities and how these will be managed moving forward. Begin by creating a comprehensive list of the departing director’s duties, projects and areas of oversight. This may include specific operational responsibilities, key client relationships, strategic initiatives or specialised knowledge areas.

Once you have this list, convene a meeting with the remaining directors and senior management to discuss how these responsibilities will be redistributed. When assigning new duties, consider each team member’s skills, experience and current workload. This redistribution may be temporary if you plan to replace the director, or it could lead to a permanent restructuring of roles within the company.

During this process, identify any gaps in expertise or capacity that may arise from the director’s departure. Be prepared to invest in resources to ensure a smooth transition and maintain the quality of your company’s operations and services. These gaps might necessitate:

• additional training for existing staff;
• hiring new employees; or
• engaging external consultants.

Other Considerations

Additionally, you should consider whether the director who is leaving your company is also a shareholder. For example, it may be that the director leaving the company also wants to sell their shares as part of the exit. 

If the company has a shareholders agreement in place, the agreement will likely detail this exit process.  Generally, the company will offer the exiting shareholder’s shares to all existing shareholders. Next, the company may offer the shares to a third-party purchaser. Alternatively, a resigning or removed director may wish to keep their shares. This may be possible, but it will be dependent on the shareholders agreement.

If there is no shareholders agreement in place, the company constitution is a good starting point to confirm the sale process.

Further, in February 2020, Parliament enacted the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act. Illegal phoenixing activity relates to the practice of creating a new company to continue an existing business that has been voluntarily shut down. The intention is to avoid:

• payment of debts; 
• outstanding taxes; and 
• costs. 

The laws aim to stop company directors from improperly backdating their resignation from the company or leaving their company without directors. If a director resigns, you must notify ASIC within 28 days of their resignation. If your company fails to notify ASIC within this time, then the lodgement date will be the effective resignation date.

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
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Key Takeaways

If a director leaves your business, either by resignation or removal, there is a process that the company must follow. To ensure your company is compliant with its corporate obligations, you must closely follow the requirements within the Corporations Act and your company constitution and shareholders agreement (if applicable). Finally, do not forget to notify ASIC of any changes.

If you are dealing with a leaving director, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1800 485 860 or visit our membership page. 

Frequently Asked Questions