Sections 134 and 135 of the Companies Act 1997 govern how a director leaves the board.
Section 134 — removal by the shareholders
(1) Subject to the constitution, a director may be removed from office by ordinary resolution passed at a meeting called for the purpose or for purposes that include the removal of the director.
(2) The notice of the meeting shall state that the purpose or a purpose of the meeting is the removal of the director.
An ordinary resolution under section 87(2) is a simple majority of the votes of shareholders entitled to vote and voting. No cause need be shown. This is the ultimate shareholder control — the answer to section 90(3), under which a management resolution does not bind the board.
Note that section 102(1)(b) lets holders of 5 per cent of the voting rights require the board to call a special meeting — and if the board does not do so within 21 days, section 102(2) allows an application to the Court under section 104, with the defaulting directors personally liable for the costs under section 102(3).
The notice must state that removal is a purpose of the meeting. That gives effect to Schedule 2 clause 2(2)(a), which requires the notice to state the nature of the business in sufficient detail to enable a shareholder to form a reasoned judgment. A removal resolution sprung on a meeting under “general business” is open to challenge.
“Subject to the constitution” means a constitution may modify the mechanism — for example by giving a class the right to remove the director it appointed, or by requiring a higher majority. It cannot, however, contain anything inconsistent with the Act.
Section 135(1) — the five ways office is vacated
(a) resigns in accordance with subsection (2); or
(b) is removed from office in accordance with this Act or the constitution; or
(c) becomes disqualified from being a director pursuant to section 129; or
(d) dies; or
(e) otherwise vacates office in accordance with the constitution.
No resolution is needed. A director who turns out to be prohibited under sections 425, 426 or 428, or who becomes of unsound mind, vacates office by operation of section 135(1)(c). The board should file the section 137 notice as soon as it becomes aware.
Paragraph (e) allows the constitution to add events — prolonged absence from board meetings, ceasing to hold a qualification share, ceasing employment, or ceasing to be nominated by the appointing shareholder.
Section 135(2) — how to resign
A director may resign by signing a written notice of resignation and sending it to the address for service of the company. The notice is effective when it is received at that address, or at a later time specified in the notice.
- It must be in writing and signed. An oral resignation, or an announcement at a meeting, does not comply.
- It must go to the address for service — the address entered on the register under section 167, not merely to a fellow director.
- Receipt is the trigger. Acceptance by the board is not required, and the board cannot refuse a resignation. A director may specify a later effective time, but not an earlier one.
Keep proof of delivery. If the company later disputes the date, the difference can determine liability for what happened in between — for example under section 348.
Section 135(3) — leaving does not end liability
Notwithstanding the vacation of office, a person who held office as a director remains liable under the provisions of this Act that impose liabilities on directors in relation to acts and omissions and decisions made while that person was a director.
Resigning removes future exposure, not past. A former director remains answerable for, among other things:
- Section 54(2) and (3) — repayment of an improper distribution;
- Sections 348 and 348A — insolvent trading and failure to keep accounting records;
- Sections 344 and 350 — transactions for inadequate or excessive consideration, and Court orders to repay money or return property;
- Section 423 — carrying on business fraudulently; and
- breaches of sections 112 to 116 committed while in office.
Under section 426 the Court may disqualify a person from managing companies, and under sections 429A to 429F a director of a failed company faces restrictions on involvement in a successor company. Resigning shortly before a collapse does not avoid either.
Practical steps
| For the company | For the departing director |
|---|---|
| File the section 137 notice within one month | Keep a copy of the signed resignation and proof of delivery |
| Check section 128 is still satisfied — at least one director, one ordinarily resident | Confirm the section 137 notice was filed — outsiders rely on it under s 19(1)(b) |
| Update the register of directors in the company records | Obtain copies of board minutes and papers for the period in office |
| Remove bank and other authorities | Note that section 123 and the general duty of confidence continue |
| Consider whether a replacement must be appointed, or a section 132 application is needed | Check the position on indemnity and insurance under s 140 for past acts |
Sources
- Companies Act 1997 — ss 19, 54, 87, 90, 102, 104, 112–116, 123, 128–137, 140, 167, 344, 348, 348A, 350, 423, 425–429F; Schedule 2
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.