These changes follow the passage of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) which aims to combat illegal phoenix activity and increase director accountability.
Will the new laws discourage illegal phoenixing activity, or will they will simply result in a “race to resign” by directors faced with challenging financial or trading conditions?
Summary of the changes
Under the new law:
- for a director resignation to take effect, ASIC must be notified of the director resignation within 28 days of the change; and
- where a director’s resignation will leave the company without a director, the resignation will typically be void.
We explore the implications of the changes in more detail below.
The law before
Prior to these changes, it was possible for directors to backdate their resignations with ASIC and obscure their prior involvement with the company. The practice of backdating resignations has been particularly common in examples of bad faith business restructuring (i.e., illegal phoenixing) where directors would typically backdate their resignation in an attempt to:
- distance themselves from business failure; and/or
- avoid personal liability exposure arising from:
- insolvent trading;
- director penalty notices; and
- workplace health and safety incidents.
The law now
A director’s resignation will now only take effect on the date the director resigned if ASIC is notified within 28 days of the resignation. If ASIC is notified outside of the 28 day period, the effective resignation date will be deemed to be the date ASIC was notified.
A working example
A company notifies ASIC of a director resignation on 1 June 2021 but states the director’s effective resignation date was 26 February 2021. Under the new changes, ASIC will record the effective date of resignation as 1 June 2021.
What if you miss the 28 day timeframe?
In circumstances where ASIC is notified outside of the 28 day timeframe, it is possible to apply to ASIC or the Court to fix the effective date of the director’s resignation to be the date the director actually resigned from the company.
Application to ASIC
If an application is made to ASIC:
- the application must be made within 56 days after the day the person stopped being a director of the company; and
- be lodged in the prescribed form.
Application to Court
If an application is made to the Court:
- the application must be made within either 12 months after the day the person stopped being a director of the company; or
- such longer period as the Court allows.
Last director standing
The law before
Despite section 201A of the Corporations Act 2001 (Cth), which prescribes the minimum number of directors required for a proprietary company, until recently it has been possible for directors to resign even if they are the last remaining director of the company and for ASIC to record this resignation. This position is out of step with the laws in several other OECD countries.
The law now
The new laws introduced changes that deal with:
- the resignation of directors; and
- the removal of directors by passing resolutions by members of a propriety company.
ASIC will now refuse to record a resignation of the last remaining director of a company, whether that resignation is notified via a Form 484 or a Form 370.
A working example
A company which only has 1 director notifies ASIC of a director resignation on 14 March 2021. No replacement directors are appointed that day, and the resignation ultimately leaves the company without an acting director. Under the new changes, the resignation will not take effect unless the company has been wound up on or after 14 March 2021.
If you are considering resigning as a director of a company:
- Ensure that ASIC is notified of your resignation within 28 days from the effective date of your resignation.
- If ASIC is not notified within 28 days, you should still ensure that ASIC is notified as soon as possible. Consider whether it is necessary to make an application to have the effective date of your resignation corrected.
- Remember: if ASIC is not notified of your resignation, your resignation will not take effect and all your legal and fiduciary obligations as a director will continue.
- You will only be able to resign or be removed as the sole director of a company if there is a replacement director who will take your place on the same day.
- Remember: Resigning as a director will not absolve you from liability relating to your conduct in the period where you were a director, nor will resigning as a director release you from liability for debts which may have been personally guaranteed, so always seek legal advice first.
In a constantly evolving legal landscape, it is crucial that directors are aware of their fiduciary obligations and take advice from appropriately qualified advisors.
If you, or someone you know, is currently looking to resign as a director of a company and you are unsure about how the amendments to the Corporations Act 2001 (Cth) apply to your circumstances, please contact us at firstname.lastname@example.org.