Ceasing to be a sole director

If you are the director of a company in Australia and no longer wish to be in that position, subject to the company’s constitution, you may resign at any time by giving written notice to the company [1]. This resignation is unilateral and need not be accepted by the company to be effective [2].

But, what if you are the only director of the company? Can you simply notify the company and resign? In the same vein, what happens if a sole director dies, becomes incapacitated, or is bankrupt?

These questions are important because sole director companies are a relatively recent corporate arrangement in Australian law, having only been introduced in 1995 [3]. Due to their immaturity, many of the difficulties that may arise in the operation of these arrangements have yet to be addressed by the courts. However, there are some steps a prudent sole director should take in these circumstances.

1) A sole director wishing to resign

As a general proposition, a director is permitted to resign from a company at any time and will not be in breach of a fiduciary duty for doing so [4]. However, pursuant to the Corporations Act 2001 (Cth)[5] (the Act) s 201A(1), a proprietary company must have at least one director. As a result, if you are the sole director of a company and elect to resign, you would apparently cause the company to breach the Act. There is some suggestion that this breach may be imputed to the resigning director for knowingly causing a company to have less than the minimum number of directors [6]. This would make both the director and the company liable under the Act, which may attract penalties [7]. But the law in this regard is undeveloped. Aside from the case of Claremont Petroleum NL v Indosuez Nominees Pty Ltd [1987] 1 Qd R 1 (which was decided before the Act came into force, and indeed before sole director companies existed) there is limited judicial opinion on this topic.

In Re Continental Pacific [2002] NSWSC 789, Barrett J, discussing the rule for public companies under s 201A(2), struggled with the idea that a company will breach the Act when multiple directors resign simultaneously, thereby causing the number of directors to fall below the statutory minimum. His Honour was concerned that an individual’s right to resign would be fettered. Nevertheless, Barrett J concluded that it is possible that a company will breach the Act in these circumstances. Arguably, in the case of a sole director company, the situation is even less ambiguous. That is, it will be obvious to a resigning director that their resignation would place the company in breach of the Act. This places a heavier burden on a sole director.

If you are the sole director of a company and wish to resign, to avoid any adverse legal proceedings against you, your best option would be to find a suitable replacement for your position prior to your resignation. This can be done via section 201F(1) of the Act which permits a sole director, who is also the sole shareholder of a company, to appoint another director. Where a sole director company has more than one shareholder, appointment needs to occur via a resolution [8].

2) Death or mental incapacitation of a sole director

In most circumstances, upon the death of a director, the board of directors can continue to manage the company while another director is appointed. Usefully, s 201F(2)(a) and (b) of the Act contemplate the situation where a sole director, who is also the sole shareholder, dies or becomes mentally incapacitated.

When either situation arises, sections 201F(3) and 201F(4) of the Act state that the appointed trustee, or personal representative of the estate, can appoint themselves as director, or appoint another person as a replacement. This director is permitted to act until the shares in the company are transferred to beneficiaries, who are then entitled to appoint a replacement. Where a sole director has died and a valid will is not in place, this process can take much longer. This may cause significant detriment to the company if it is unable to function in the meantime. Therefore, as a sole director, having a valid will in place is essential. The solution to this problem is less clear in situations where the company has more than one shareholder. It may be the case that the shareholders can appoint a new director pursuant to s 201G of the Act.

3) A bankrupt sole director

The Act stipulates that a person who is an undischarged bankrupt under the laws of Australia is disqualified from managing a corporation [9]. Who then, in the case of a sole director company, will manage the company where the sole director is bankrupt? As in the situation involving death or mental incapacitation, the Act has made some provisions for sole director/sole shareholder companies. Sections 201F(3)(a) and 201F(4) of the Act empower the personal representative or trustee of the bankrupt estate to appoint themselves, or another person, as director. As above, where the company has more than one shareholder, it may be the case that the shareholders can appoint a new director pursuant to s 201G of the Act.

In summary, the Act has a number of provisions to cover situations where a sole director no longer wishes, or cannot continue, to manage a company. Much uncertainty remains however, particularly where a director wishes to resign. To ensure that the company suffers as little detriment as possible, a prudent sole director should have a succession plan in place for when they are no longer willing, or able, to act in their role.

[1] Corporations Act 2001 (Cth) s 203A.

[2] Siyali v Rangi (1986) 4 ACLC 239 at 241-2.

[3] Rafal Zakrzewski, ‘The Law Relating to Single Director and Single Shareholder Companies’, (1999) 17 CSLJ 156, 156.

[4] CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 at [83] and [95].

[5] Corporations Act 2001 (Cth).

[6] Claremont Petroleum NL v Indosuez Nominees Pty Ltd [1987] 1 Qd R 1; (1986) 10 ACLR 520; 4 ACLC 315.

[7] A director could be personally liable under, e.g., s 181. A company could be liable under, e.g., s 201A(1).

[8] Corporations Act 2001 (Cth) s 201G, s 201H.

[9] Corporations Act 2001 (Cth) s 206B(3).