Case offers guidance on Australian administrators' ability to remove and replace directors

Although section 442A of the Corporations Act 2001 (Cth) (‘the Act’) gives administrators the power to remove a director from office or appoint a replacement to a company, section 437A of the Act sets out the role of an administrator and specifies that while a company is in administration, the administrator has control of the company’s business, property and affairs. 

In light of rising insolvencies, particularly in the construction industry, a previous decision in Scott v Hinchinbrook Services Ltd offers insight for insolvency professions into the requirements governing an administrator’s powers to remove and replace directors of a company. 

The decision in Hinchinbrook raises several considerations for administrators:  

• Normal statutory eligibility requirements to serve as a director apply to any appointments made by administrators; 
• Administrators are not confined to only appointing directors to a company who would be eligible under the company’s constitution, with the court observing that “it is difficult to see how the constitution’s effect as a contract could prevent the exercise of a power conferred by statute upon a person who is a stranger to that contract”; and Administrators have fiduciary and statutory obligations in any appointment of directors. 

Administrators have practical considerations in respect to their powers to appoint directors in the context of any deeds of company arrangement because a company’s constitution often relies on the replaceable rules contained in the Act. 

Sections 201G and 203C of the Act are relevant to the appointment and removal of directors. Specifically, a company may appoint a person as a director by resolution passed at a general meeting and a proprietary company may, by resolution, remove a director from office and appoint another person as a director instead.  

Other practical considerations for insolvency practitioners include:  

• Administrators should ensure that any proposals for deeds of company arrangement contemplates the appropriate mechanism and manner for both the removal and appointment of any directors to the company, while considering having regard to both the administrators’ powers under section 442A and the replaceable rules contained within the Act.  
• It is the exercise of the administrators’ powers that directors are removed and replaced from a company under section 442A of the Act, and this is not achieved by the operation of a deed of company arrangement. 
• Administrators must consider the purposes of the external administration planning of the eligibility criteria for any replacement directors to the company, and their general fiduciary and statutory obligations in any appointment of directors to a company.