Charges dropped after legal loophole paralyses council

The charges had been brought against Mayor Tony Clark and four councillors by Mr Penman, who helps his daughter maintain a rental property in Hepburn.

In Victoria, any councillor facing criminal charges must step down while the matter is dealt with in court, meaning only two of seven councillors remained active.

The businessman said he accepted the decision, adding he respected democracy.

"It was never personal. It was about holding people to account for making silly decisions," Mr Penman told AAP on Wednesday.

"The councillors got a lifeline."

His allegations largely concerned the council's latest annual budget, which he claimed were adopted unlawfully, without following proper processes.

The Director of Public Prosecutions appeared in Ballarat Magistrates Court on Wednesday to take over the charges, before successfully applying to have them thrown out.

A Hepburn Shire Council spokesperson confirmed the DPP took over all matters, and the charges were dismissed.

"The DPP having reviewed all the evidence determined that there were insufficient grounds available to proceed with the prosecutions," the spokesperson said.

"This is a great outcome for democracy and our community."

Rural Councils Victoria welcomed the DPP's move, but warned the legal loophole which allowed the situation to develop still remained.

It said the intervention didn't fix the broader problem.

"The underlying legislative flaw still remains unresolved," Chair Rob Amos said in a statement.

"Until the Victorian government changes the law and closes the loophole that forces councillors to stand aside for private criminal prosecutions, the threat will continue."

The state government has previously introduced legislation to allow councillors to continue their work while facing private prosecutions.

Any individual can initiate a private criminal proceeding without the involvement of police.