Boards of directors are responsible for managing the affairs of the company and the shareholders are the repository of ownership. That time-honoured dichotomy has always characterised the basic corporate paradigm. But what happens when a company has no directors or fewer directors than the statutory minimum? Will it be unable to act or will third parties be prevented from taking action against it?
Our experience suggests that this issue will commonly arise in practice.
Relevantly, section s201A of the Corporations Act 2001 provides that a proprietary company must have at least one director and that director must ordinarily reside in Australia. A public company, on the other hand, must have at least three directors, two of which must ordinarily reside in Australia.
Companies are not permitted, for any period of time, to function without the required number of officers. The consequences of breach of s201A can be:
- ASIC can serve a penalty notice on the company requiring the company to pay a penalty of $1,062.50; and
- the company may also be prosecuted for failing in its statutory obligation to have the minimum number of officeholders.
Should a company be in contravention of s201A by having insufficient numbers of directors, it neither becomes defunct nor is unable to act (DVT Holdings v Bigshop.com.au (2002) 42 ACSR 378). A company can act through its two decision-making organs: the board of directors or the members acting in a general meeting. In cases where there are an insufficient number of directors, it has been held that there is a residual common law power for members in a general meeting to appoint directors (thus enabling the board to act). Further, a company’s contravention of s201A should not derogate from a third party’s ability to take action against that company as and when appropriate. It is a contravention by the company which exposes it to penalty, but nonetheless it still has means to carry out its functions as a company.
A company that finds itself in the position without directors or fewer than the statutory minimum should immediately take steps to remedy this through a resolution of members to appoint new directors.