Question

Truth Enterprises Ltd (Truth) is a company that was incorporated in 2008. The constitution of Truth has the following stated object:

“the business of the company is to invest in online retail fashion stores”.

Truth has three directors, Rhonda, Maria and Miranda, who together own 20% of the company’s shares. The remaining shares are split equally between four investors: Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice.

Since incorporation, Truth has not returned a great deal of profits to members. Mrs Cale, Mr Giuseppe and Dr Rice think they have an idea to greatly enhance the profitability of Truth. They put forth a proposal at a members’ meeting that Truth should purchase a number of high-end retail fashion stores (i.e. “bricks and mortar” businesses).

Rhonda, Maria and Miranda are not keen on the members’ proposal. However, the three directors are informed that they will be removed from the Board if they do not comply with the proposal of Mrs Cale, Mr Giuseppe and Dr Rice. Although Mr JJ does not support them, Mrs Cale, Mr Giuseppe and Dr Rice have sufficient voting power together to action the removal of the three directors. Therefore Rhonda, Maria and Miranda feel compelled to act in accordance with the wishes of the 3 shareholders.

Question 1: Answer all parts A, B, C and D

A). Identify which section of the Corporations Act 2001 (Cth) gives members the power to remove directors in a company such as Truth Enterprises Ltd (1 mark).

B). Identify which section of the Corporations Act 2001 (Cth) gives members the power to appoint a new director in a company such as Truth Enterprises Ltd (1 mark).

C). What are the requirements to be appointed as a director? Refer to the relevant sections of the Corporations Act 2001 (Cth) in your answer .

D). Discuss the consequences of a breach of constitutional objects for Truth Enterprises Ltd and its directors and shareholders, referring to the relevant sections of the Corporations Act 2001 (Cth) .

Answer 1

A. CORPORATIONS ACT 2001 (CTH) GIVES MEMBERS THE POWER TO REMOVE DIRECTORS IN A COMPANY

Removal by members--public companies

Resolution for removal of director

(1) A public company may by resolution remove a director from office despite anything in

a. the company's constitution (if any); or

b. an agreement between the company and the director; or

c. an agreement between any or all members of the company and the director.

(2)   Notice of intention to move the resolution must be given to the company at least 2 months before the meeting is to be held. However, if the company calls a meeting after the notice of intention is given under this subsection, the meeting may pass the resolution even though the meeting is held less than 2 months after the notice of intention is given.

(3) The company must give the director a copy of the notice as soon as practicable after it is received.

(4) The director is entitled to put their case to members by:

a. giving the company a written statement for circulation to members

b. speaking to the motion at the meeting (whether or not the director is a member of the company).

                                                      If the director was appointed to represent the interests of particular shareholders or debenture holders, the resolution to remove the director does not take effect until a replacement to represent their interests has been appointed.

                       As a general rule, a company’s constitution will deal with resignations and removal of directors, as well as the procedures for filling casual vacancies caused by a director leaving the company. Sections 203A – 203F of the Corporations Act 2001 (Cth) provides for the resignation, retirement and removal of directors. Following are some general

Observations as well as some requirements for specific types of companies.

                                                 Directors resign by giving written notice to the company’s registered office (Corporations Act 2001, s 203A (a replaceable rule)). Alternatively, they can give written notice of the resignation to the Australian Securities and Investments Commission (ASIC). However, this must be accompanied by the letter of resignation given to the company (s 205A (1), (2)). The company must give notice to ASIC of a director’s resignation within 28 days unless the director has given the notice to ASIC discussed above (s 205B). It is very important for a director seeking to resign to follow the formalities. Otherwise, for example, if the company becomes insolvent while the director’s name is still on the record, then the director may face legal action for insolvent trading or other provisions under the Corporations Act 2001.

                  There are a number of ways in which a director

Can leave or be removed from office.

• Resignation

• Rotation of directors in listed companies

• Invalid appointment

• Removal by members (or directors in proprietary

Companies)

• A breach of provisions set out in the company’s

Constitution, for example:

- Not turning up to meetings for a prescribed

Period of time (commonly three to six months)

- Becoming of unsound mind

- Failing to declare an interest in a contract with

The company

• Disqualification from managing a corporation

• Un discharged bankruptcy or failing to comply with

Insolvency procedures

• Death

B. CORPORATIONS ACT 2001 (CTH) GIVES MEMBERS THE POWER TO APPOINT A NEW DIRECTOR IN A COMPANY

CORPORATIONS ACT 2001 - SECT 201H

Directors may appoint other directors

(1) The directors of a company may appoint a person as a director. A person can be appointed as a director in order to make up a quorum for a directors' meeting even if the total number of directors of the company is not enough to make up that quorum.

Proprietary company—confirmation by meeting within 2 months

(2) If a person is appointed under this section as a director of a proprietary company, the company must confirm the appointment by resolution within 2 months after the appointment is made. If the appointment is not confirmed, the person ceases to be a director of the company at the end of those 2 months.

Public company—confirmation by next AGM

(3) If a person is appointed by the other directors as a director of a public company, the company must confirm the appointment by resolution at the company's next AGM. If the appointment is not confirmed, the person ceases to be a director of the company at the end of the AGM.

SECTION 201F SPECIAL RULES FOR THE APPOINTMENT OF DIRECTORS FOR SINGLE DIRECTOR/SINGLE SHAREHOLDER PROPRIETARY COMPANIES

201F (1) [Power to appoint another director]

The director of a proprietary company who is its only director and only shareholder may appoint another director by recording the appointment and signing the record.

201F(2) Appointment of new director on death, mental incapacity or bankruptcy.

If a person who is the only director and the only shareholder of a proprietary company:

(a) dies; or

(b) cannot manage the company because of the person's mental incapacity;

(c) and a personal representative or trustee is appointed to administer the person's estate or property, the personal representative or trustee may appoint a person as the director of the company.

201F(3) [Appointment upon bankruptcy]

(a) the office of the director of a proprietary company is vacated under subsection 206B(3) or (4) because of the bankruptcy of the director; and

(b) the person is the only director and the only shareholder of the company; and

(c) a trustee in bankruptcy is appointed to the person's property;

the trustee may appoint a person as the director of the company.

201F(4) [Power to appoint themselves]

A person who has a power of appointment under subsection (2) or (3) may appoint themselves as director.

201F(5) [Effect of appointment]

A person appointed as a director of a company under subsection (2), (3) or (4) holds office as if they had been appointed in the usual way.

C. REQUIREMENTS TO BE APPOINTED AS A DIRECTOR

Only an individual who is at least 18 years old can be a director. If a company has only 1 director, they must ordinarily reside in Australia. If a company has more than 1 director, at least 1 of the directors must ordinarily reside in Australia. A director must consent in writing to holding the position of director. The company must keep the consent and must notify ASIC of the appointment. In some circumstances, the Corporations Act imposes the duties and obligations of a director on a person who, although not formally appointed as a director of a company, nevertheless acts as a director or gives instructions to the formally appointed directors as to how they should act. The Court or ASIC may prohibit a person from being a director or from otherwise being involved in the management of a company if, for example, the person has breached the Corporations Act. A person needs the Court's permission to be a director if the person has been convicted of certain offences or is, in some circumstances, unable to pay their debts as they fall due. Generally, a director may resign by giving notice of the resignation to the company. The company must notify ASIC of a director's resignation. A director who resigns may also notify ASIC of the resignation.

                      In managing the business of a company each of its directors is subject to a wide range of duties under the Corporations Act and other laws. Some of the more important duties are:

1. to act in good faith

2. to act in the best interests of the company

3. to avoid conflicts between the interests of the company and the director's interests

4. to act honestly

5. to exercise care and diligence

6. to prevent the company trading while it is unable to pay its debts

7. if the company is being wound up—to report to the liquidator on the affairs of the company

8. if the company is being wound up—to help the liquidator (by, for example, giving to the liquidator any records of the company that the director has). A director who fails to perform their duties:

9. may be guilty of a criminal offence with a penalty of $200,000 or imprisonment for up to 5 years, or both; and

10. may contravene a civil penalty provision (and the Court may order the person to pay to the Commonwealth an amount of up to $200,000); and

11. may be personally liable to compensate the company or others for any loss or damage they suffer; and

12. may be prohibited from managing a company. A director's obligations may continue even after the company has been deregistered.

D. CONSEQUENCES OF A BREACH OF CONSTITUTIONAL OBJECTS AND DIRECTORS AND SHAREHOLDERS, REFERRING TO THE RELEVANT SECTIONS OF THE CORPORATIONS ACT 2001 (CTH)

Consequences of breach

(1) If the public company or entity contravenes section 208:

(a) the contravention does not affect the validity of any contract or transaction connected with the giving of the benefit; and

(b) the public company or entity is not guilty of an offence

(A Court may order an injunction to stop the company or entity giving the benefit to the related party )

(2) A person contravenes this subsection if they are involved in a contravention of section 208 by a public company or entity.

Note 1:       This subsection is a civil penalty provision.

Note 2:       Section 79 defines involved.

(3) A person commits an offence if they are involved in a contravention of section 208 by a public company or entity and the involvement is dishonest.