This case illustrates the importance of strictly adhering to any procedure for the removal of directors to minimise the risk that removal of a director (and potentially the subsequent appointment of another director) will be invalid.  The case also reminds us that directors appointed on registration of a company are appointed under sections 117 and 120(1) of the Corporations Act 2001 (Cth), and therefore may not (without careful drafting) be subject to any regime in the constitution or any shareholders’ agreement for the removal of nominee directors.

Mr Peters (a director of Allied Resource Partners Pty Ltd (Allied)) sent a Default Notice to the Allied company secretary alleging that Mr Shearwood (another Allied director) had breached the Allied Shareholder’s Agreement.  Clause 15.3.1(b) of the Allied Shareholders’ Agreement provided that when a Default Notice is served, “each Director, including themselves, appointed by the Defaulting Shareholder is automatically removed”.

Mr Peters then took steps to:

  • remove Mr Shearwood as director; and
  • relying on clause 10.11(e) of the Shareholders’ Agreement (which operated only when there was an insufficient quorum of directors), appoint another director in Mr Shearwood’s place.

In holding that the removal of Mr Shearwood (and the appointment of the new director) was invalid, Markovic J in the Federal Court of Australia found that:

  • Mr Shearwood was not appointed as a director by a ‘Defaulting Shareholder’ as contemplated by the Shareholders’ Agreement and could not therefore be removed under clause 15.3.1(b).  In fact, Mr Shearwood had become a director upon the registration of Allied under sections 117 and 120(1) of the Corporations Act (which deal with the appointment of directors on registration, and the Allied Constitution and Shareholders’ Agreement did no more than reflect the identity of Allied’s officeholders upon registration (and what had occurred under sections 117 and 120(1)).  As such, to remove Mr Shearwood, Mr Peters would have had to comply with other provisions in the Shareholders’ Agreement which required 70% shareholder approval;
  • a clause in the Shareholders Agreement which provided that the initial period of a directorship would be 3 years did not of itself serve to automatically remove a director at the end of those 3 years.  Something more is required and in this case, did not occur.  No steps were taken to convene a meeting to reappoint or replace Mr Shearwood, nor was he removed at that time by any methods set out in the Allied Constitution or Shareholders’ Agreement; and
  • as Mr Shearwood remained a director, there was no quorum deficiency and therefore clause 10.11(e) did not operate.