State Street Australia and Section 203D of the Corporations Act

On 7 June 2016, Beach J, Federal Court of Australia, handed down his judgement for the case, State Street Australia.[1] In his decision, Beach J considered the interpretation of s 203D of the Corporations Act 2001 (Cth) (the “Act”), which delineates a statutory process for the removal of directors by members of a public company. One of the issues in dispute was whether the section provided an exhaustive codification of the process for a removal of a director, or whether the section should be read as merely one method of removal, without prohibiting other methods provided by a company’s constitution.

Section 203D(1) of the Corporations Act  states:

• • A public company may by resolution remove a director from office despite anything in:

    • • the company’s constitution (if any); or
    • • an agreement between the company and the director; or
    • • an agreement between any or all members of the company and the director.

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.

 

Decision

In deciding on this issue, Beach J expressed the view that “although s 203D(1) is mandatory in the sense that it overrides a company’s constitution to the extent of any inconsistency, it does not provide an exhaustive codification of the mechanism for removal.”[2] In reaching this decision, Beach J firstly considered the construction of the section, before turning to relevant authorities.

 

Reasoning

Notably, Beach J directly addressed the previous and conflicting decision of Bryson AJ in Scottish & Colonial Ltd.[3]  In Scottish & Colonial, Bryson AJ’s gave attention to the different wording of section 203D in contrast to its precursor section prior to the Corporate Law Economic Reform Program Act 1999 (Cth). Whereas the current section uses the word “despite”, the precursor section used the words “notwithstanding”.  Bryson AJ reasoned that the strong nature of the language in the current section showed an intention to diverge from the interpretation of earlier provisions and, considering the emphatic wording, the current section should operate regardless of whether a company’s constitution afforded directors with less or no protection.[4]

In considering a number of other authorities, Beach J concluded that Bryson AJ’s decision in Scottish & Colonial “is not consistent with the prevailing view”,[5] and an “outlier”.[6] Consequently, Beach J decided “not to follow it”.[7] In reaching this decision Beach J considered a number of cases, all of which either directly or indirectly move away from the position taken by Bryson AJ.[8]

Further to his analysis of Australian case law, Beach J also raised 6 points regarding the construction of the section in support of the conclusion that s 203D of the Act “provides a mechanism rather than the mechanism”[9] for the removal of directors by members in a public company. These points are briefly summarised as follows:

• • The section uses the language “may” rather than “may only…” Accordingly, the language is not restrictive.[10]

• • The section uses the phrase “despite anything”.[11] Implicitly, the interpretation of these words is limited only to any inconsistency in a company’s constitution.

• • “Nothing turns on the point that the section is not a replaceable rule.”[12]

• • Nothing can be read from the absence in the section of a predecessor subsection from a previous Act. This is because “Such a subsection [is] unnecessary given the plain text of s 203D(1).”[13]

• • Subsections (2) to (6) repeatedly refer to “the director” and “the resolution”. Thus, in the words of Beach J, “It is apparent that all other rights are attached to and triggered by the utilisation of the mechanism under subsection (1) only.”[14] The text does not indicate an intention for the rights in subsections (2) through to (6) to be conferred in all cases, but only where subsection (1) has been triggered. Hence, the application of section 203D is not given a comprehensive scope.

• • The proviso uses definite articles ( “the director” and “the resolution”) as a reference back to subsection (1). Thus, proviso is coupled with the operative part of the section and “cannot separately be said to be mandatory in all cases where the operative provision was not.”[15]

 

Future Lessons

Therefore it seems that a public company constitution (including companies limited by guarantee) can adopt an alternative process in their constitution for the removal of directors. Many charities and not for profits are incorporated by way of a company limited by guarantee.

Did you know that a public company constitution can allow for the removal of directors?

 

The removal of Directors has serious consequences, seek legal advice

Contact us. Call (07) 3252 0011 and speak with our Business Development Team today to book an appointment with our commercial lawyers.

Written by Andrew Lind (Director) and Callum Gibson (Graduate Law Clerk).

 

Footnotes

[1] State Street Australia Ltd in its capacity as Custodian for Retail Employees Superannuation Pty Ltd (Trustee) v Retirement Villages Group Management Pty Ltd [2016] FCA 675.

[2] Ibid, [16].

[3] Scottish & Colonial Ltd v Australian Power and Gas Co Ltd [2007] NSWSC 1266

[4] State Street Australia as per Beach J at [27] quoting Scottish & Colonial Ltd at [17], [21], [39], and [41].

[5] State Street Australia, [33].

[6] Ibid, [26].

[7] Ibid, [33].

[8] Allied Mining & Processing Ltd v Boldbow Pty Ltd [2002] WASC 195; Attorney-General of the Commonwealth v Oates [1999] HCA 35; Dick v Comvergent Telecommunications Ltd [2000] NSWSC 331; Bisan Ltd v Cellante [2002] VSC 504; Central Exchange Ltd v Rivkin Financial Services Ltd [2004] FCA 1546; (2004) 213 ALR 771; Dalkeith Resources Pty Ltd v Regis Resources Ltd [2012] VSC 288

[9] Ibid, [17].

[10] Ibid.

[11] Ibid, [18].

[12] Ibid, [19].

[13] Ibid, [20].

[14] Ibid, [21].

[15] Ibid, [22].