Without proper legal guidance, sacking a managing director of a company for serious misconduct can be a very risky business, particularly if the person is litigious, dishonest, or vexatious, or if they seek to hinder further investigation into underlying criminal activity such as fraud.

At Boss Lawyers, we have assisted the boards of public companies, private companies and charities to successfully remove managing directors, directors and company secretaries from office and to terminate their employment contracts on the grounds of serious misconduct.

This article sets out some of the challenges sometimes faced by companies when terminating and removing managing directors – challenges that we have assisted clients to successfully navigate and overcome.

Roles and duties

A director of a company who is also an employee is subject to various roles and duties including the statutory, common law and fiduciary duties of a director; the statutory contract between the officer and the company by reason of the company’s constitution and the replaceable rules;[1] and any contract of employment and common law duties.  It is also not uncommon for some directors to also be significant shareholders and party to a shareholder agreement.

The process of dismissing and removing a company officer who is also an employee of the company needs to take into account the legal requirements involved in complying with the requirements of the Corporations Act and company’s constitution on one hand, and employment laws (including statutory unfair dismissal provisions) on the other.

The company will also need to consider other issues and preventative measures such as managing control of and access to commercially sensitive information and confidential documents, securing bank accounts, email accounts, ASIC Corporate Keys, company social media, protecting key stakeholder relationships and company opportunities, recovering company property, and dealing with any shares held by the director.

Application of Corporations Act – corporate governance

The statutory requirements for removing a director from a company will differ depending whether the company is a public company or a proprietary limited company.

In the case of a public company, a director cannot be removed by the other directors.[2]  The Corporations Act sets out the procedure for shareholders to remove the director at a general meeting.[3]  This process initially requires the issue of a notice of intention to move the resolution to remove the director, which must be given to the company at least two months before the meeting is held,[4] after which the company must call the meeting within 21 days.[5]  The company is also required to provide a copy of the notice of intention to the affected director,[6]  who is then entitled to put their case to members by giving the company a written statement for circulation to members and speaking to the motion at the meeting.[7]

In the case of a proprietary limited company, the Corporations Act provides that the company may remove a director by resolution,[8] or alternatively, the process may be set out in the company’s constitution, to be carried out in accordance with its terms.

Termination of employment – Unfair Dismissal

In the case of an employed director, unfair dismissal provisions under the Fair Work Act will apply if the director meets the usual employee eligibility criteria under that Act and the director lodges an application alleging that their dismissal was, in all circumstances, “harsh, unjust or unreasonable.”

It is not uncommon for disgruntled ex-employees to lodge unfair dismissal claims either to redress perceived wrongs, or in retaliation for the dismissal, particularly given that the Fair Work Commission (“the Commission”) does not generally order the unsuccessful party to pay the other party’s costs.  That avenue is no less applicable to a dismissed employee-director.

Complex issues proving dismissal was fair

Unfair dismissal claims brought by employed directors (particularly managing directors) can involve complex issues that are difficult to deal with when compared to usual employment relationships.

For example, a common ground used to establish that the dismissal was unfair is that there was no valid reason for the termination related to the person’s capacity or conduct.[9]  Determination of this ground will often require consideration by the Commission of the context in which the behaviour occurred and the gravity of the conduct itself.[10]

In most employment situations, there will be a clear distinction regarding the issue of authority between the employer and the employee.  However, in the case of an employed director, the position may be much less clear and open to significant debate.  Given that the business of a company is managed by or under the direction of the directors,[11] the employee director may seek to argue that, irrespective of what the employment contract may say to the contrary, the conduct complained of was authorised in some way in their capacity as a director.

The common scenario of an employee failing to comply with a lawful direction by a manager demonstrates some of the difficulties.  An employee has an obligation to obey directions about the performance of the contracted work that are lawful, reasonable, consistent with the contract, and within the scope of the employment.  Wilful disobedience will amount to a breach of the obligation.

In the case of the managing director however, the director may seek to argue that their authority to engage in the conduct can be implied from either within the company’s Constitution, resolutions of the board, or informal conversations had with other directors, or that the direction itself was given without authority, or that the accusers themselves are acting outside of their authority.

These arguments can raise complex disputes regarding the scope of duties and authority of directors under corporate governance laws and rules which may need to be addressed to establish that the termination was justified.  However, the informality of Fair Work Commission unfair dismissal proceedings which greatly simplify, but reduce, the procedural fairness steps imposed by State or Federal Court rules, along with the lack of specialised corporations law expertise, can mean that the Fair Work Commission may be ill-equipped to comprehensively deal with these issues.

Timing can also be particularly challenging.  The summary dismissal of a managing director will often require several concurrent acts involving different processes within a short period of time.  This can create conflict between the need to move quickly to quarantine a potentially difficult employee in order to protect the company or preserve evidence; the procedural and notice period requirements under the Corporations Act relating to the removal of a director; and the requirements under employment law and the unfair dismissal laws requiring an employer to properly investigate alleged misconduct prior to making the decision to dismiss the employee.

Further, the company may be forced to maintain a delicate balance between the provision of information required by stakeholders to justify the removal of the director on one hand, and the risk of a potential defamation claim regarding statements contained in that information on the other.

What becomes obvious is that the processes involved in removing an employee director must be carefully coordinated and managed if the company is to successfully navigate its way through to the successful resolution of any dispute regarding the removal of the director.

Misuse of corporate governance procedures

Particularly litigious or vexatious directors may also seek to take unfair advantage of corporate governance mechanisms to frustrate any attempt to have them removed.

For example, Boss Lawyers was involved in the summary dismissal of a managing director, who then responded to her removal by purporting to call an urgent members meeting which she stacked with her friends, relatives and associates.   Those members resolved that existing board members be removed and replaced with friends of the sacked director.  Those “new” directors then held their own board meeting to reappoint the managing director who had been sacked.   In that case, in accordance with our advice, our client instructed us to file an application to the Court to resolve the matter which resulted in the meetings being declared invalid.

We have also been involved in matters where shortly after their summary dismissal, managing directors who had been solely responsible for preparing and signing the companies’ board meeting minutes, sought to rely on documents prepared by them purporting to be minutes of board meetings authorising the conduct complained of.

Winding up the company – weapon of mass destruction?

In certain circumstances, the Corporation Act may also provide a director with a “nuclear option” – the opportunity to apply to the court to have the company wound up, particularly on the grounds of “deadlock”.

Winding up due to deadlock typically occurs by reference to the company being analogous to a partnership, for example where the members of the company are associated on the basis of a personal relationship involving mutual confidence; there is an agreement or understanding that all or some of the members will participate in the conduct of the business; and where there are restrictions upon the transfer of members’ interests in the company.[12]

If the application is successful, then a liquidator can be appointed and the company itself can effectively end.  Alternatively, even if brought without any reasonable basis, having to defend against a winding up application can place a significant financial burden on a company.

Boss Lawyers is ready to assist you

Sacking a managing director from a company or corporate group for serious misconduct can be a risky and complex undertaking.

At Boss Lawyers, we have assisted the boards of public companies, private companies, company groups and charities to successfully dismiss and remove managing directors, directors and company secretaries who allegedly engaged in serious misconduct.

For practical legal advice, support and assistance regarding your particular circumstances, get in touch with us.   We are ready to step in and assist you.

References:

[1] Formed by section 140 of the Corporations Act 2001.

[2] Corporations Act s 203E.

[3] Corporations Act s 203D.

[4] Corporations Act s 203D.

[5] Corporations Act s 249D(5).  If the directors fail to do so, then the meeting can be called by the members (s 249F) or the court (s 249G).

[6] Corporations Act s 203D(3).

[7] Corporations Act s 203D(4).

[8] Corporations Act s 203C.

[9] See: Fair Work Act s 387(a).

[10] IGA Distribution (Vic) v Nguyen [2011] FWAFB 4070, [14].

[11] Corporations Act s 198A.

[12] Re Westbourne Galleries Ltd [1970] 3 All ER 374.