New Director Resignation Laws Address Illegal Phoenix Activity

phoenix

Earlier this year the Corporations Act was amended in an effort to further clamp down on illegal phoenix activity by company directors.

Phoenix, in this context, is where a distressed company’s assets are stripped and transferred at an undervalue to a new company which then continues to carry on the business, leaving the old company with the debts and in liquidation, and often resulting in unsecured creditors receiving nothing.

Certain of these amendments, introduced under the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), was aimed at the director resignation process, to avoid a company being without a director, and to prohibit back-dated director resignations. The purpose is to make it more difficult for directors to escape liability for illegal phoenix activity.

The new process for director resignations under the recently added section 203AA of the Corporations Act is:

  1. Where a director resigns, the company or the director must notify ASIC within 28 days of the resignation.
  2. If the notification is made to ASIC within that time, then the effective date of the resignation is the actual date of the resignation.
  3. However, if the resignation is not notified to ASIC within 28 days, then the effective date of the resignation is the date ASIC is actually notified.

A director’s resignation will not be effective if it would leave the company without a director unless the resignation is to take effect on or after the liquidation of the company, which is permitted (s. 203AB). Similarly, any member’s resolution to remove a director will be void if it leaves the company without any director (s. 203CA).

The effect of this process is that, if the director resignation notice is not given within the time allowed, it will be more difficult for a director to avoid personal liability for certain company activities, including under a director penalty notice for certain company tax debts, for the period prior to a notification to ASIC of their resignation.

In circumstances where a director has resigned but failed to notify ASIC within the required 28 days, the director does have the option of making an application either to the Court or to ASIC (within certain time limits) to have the effective resignation date fixed as the day of the actual resignation.

The Court will only make such an order if it is satisfied it is just and equitable to do so.

In the case of an application made to ASIC, ASIC must have regard to the reasons for any delay in the director notifying the resignation, and any conduct, act, omission or representation of the director in relation to notifying ASIC of the resignation. Consequently, it will be necessary for the director to have, at a minimum, a reasonable explanation for the delay and a convincing reason for why the effective date should be changed.

The new process affects all company directors (not just those who may participate in phoenix activity). Accordingly, even for directors resigning under normal circumstances, it is very important to ensure accurate record-keeping, proper corporate governance, meticulous compliance with director duties and that company details are kept up-to-date.

 

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

 

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