Director, a title that sounds impressive by itself, typically carries a very important role in a company. Just how important is this position, and how is a director appointed or removed? Today we will walk through what you must know about the role of director when running a company in Australia.
Key duties of a director
Generally speaking, the role of a director is to manage the company. Their conduct must be accountable to every level of the company, including the shareholders, other creditors, employees and even subsidiaries.
Just how important is a company director? For example, when signing a document on behalf of the company, who must sign for it to be legally effective?
Under the Corporations Act, unless the company’s constitution provides otherwise, a document is generally taken to be signed on behalf of the company when it is signed by:
1. two directors of the company; or
2. one director and one company secretary; or
3. if the company has only one director who is also the sole secretary, by that director.
Once signed in this way, a third party is entitled to assume that the signatory has authority to act for the company. This shows just how important directors are.
Duties owed by a director
By the same token, company directors also carry equivalent responsibilities and duties. Under Australian corporations law, a company director must:
1. exercise their powers and duties with care and diligence;
2. exercise their powers and duties in good faith, and in the best interests of the company;
3. not use their position to gain an advantage for themselves or someone else, and not act in a way that would cause detriment to the company;
4. not use information obtained through their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
Even when a company runs into financial difficulty, directors also have a duty to prevent insolvent trading.
How is a director appointed?
1. Who can become a director
A person appointed as a director must be at least 18 years old and must consent to taking on the role. Before being appointed, you must provide written consent, and the company must notify ASIC.
If the company is a proprietary company (with "Pty" in its name), it must have at least one director, and that director must ordinarily reside in Australia. If the company is a public company (without "Pty" in its name), it must have at least three directors, at least two of whom must ordinarily reside in Australia. A public company must also have at least one secretary, and that secretary must ordinarily reside in Australia.
2. How to appoint
Ordinarily, the manner of appointing directors can be set out in the company’s constitution. If there is no constitution, the company can rely on the replaceable rules to make the appointment.
The replaceable rules are the basic rules that govern a company. If a company chooses to rely on the replaceable rules, it does not need to have a written constitution.
An appointment can be made in the following ways:
• the company can appoint a person as a director by resolution passed at a general meeting of shareholders;
• the directors of the company can appoint a person as a director.
– For a proprietary company, the company must confirm the appointment by resolution within two months of the appointment. If the appointment is not confirmed, the person ceases to be a director at the end of that two-month period.
– For a public company, the company must confirm the appointment by resolution at the company’s next annual general meeting (AGM). If the appointment is not confirmed, the person ceases to be a director at the end of that AGM.
3. How to remove a director
Similarly, the removal of a company director can be dealt with in the constitution. If there is no constitution, the company can rely on the replaceable rules.
• If the replaceable rules apply:
A director may resign from office by giving written notice of resignation to the company’s registered office.
– A proprietary company may remove a director by ordinary resolution. An ordinary resolution is passed when a majority of shareholders vote in favour. Unless the constitution provides otherwise, a resolution of the board of directors can also generally remove a director of a proprietary company.
– A public company may remove a director by resolution at a general meeting of shareholders. However, shareholders must give prior notice of their intention to do so. Directors of a public company cannot be removed by the other directors.
Final thoughts
The importance of a director in an Australian company goes without saying: the greater the control over the company, the greater the responsibilities and duties that come with the role. Because so much is at stake, the Corporations Act sets out detailed rules on directors’ duties and on the procedures for appointing and removing directors. If you have any questions about how best to draft a constitution for the management and operation of your company, or any other corporations-law issue, we recommend seeking assistance from our professionals.
