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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. 

Is the resigning director the company’s sole director? If so, your company must appoint a new director to continue the company operations. Additionally, you may be the sole director and shareholder of the company and want to cease operating your business. In that case, it may be appropriate to de-register or shut down your business instead of resigning as director. 

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 ends 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 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.

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.

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. For more information on your corporate obligations and dealing with a leaving director, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What are the ways a director can leave a company?

First, a director can leave a company through resignation. To do so, they must give the company written notice of their resignation. Following this, your company will need to notify ASIC of the resignation. A second method is if the company board or shareholders decide to remove a director. In this case, the board or shareholders must pass the appropriate resolution, and the company must notify ASIC of the director removal.

Why should I be cautious of illegal phoenixing?

The Treasury Laws Amendment (Combatting Illegal Phoenixing) Act makes unlawful any phoenixing activity related to the practice of creating a new company to continue an existing business that has been voluntarily shut down. This usually occurs when directors aim to avoid the payment of debts, any outstanding taxes and costs. Therefore, if your company is in a situation where a director is leaving, beware of any phoenixing activity.

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