New director resignation laws preventing illegal phoenixing have commenced

New director resignation laws preventing illegal phoenixing have commenced

13 October 2021 Authored by: Tom Jury and Adelaide Hayes   |   Topics: Compliance and corporate governance, Insolvency and restructuring

Director resignations are no longer effective if ASIC is not properly notified of the resignation within 28 days or if the resignation would leave the company with no directors.

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) was passed to amend the Corporations Act 2001 (Cth) and assist regulators and liquidators to combat illegal phoenix activity. Illegal phoenix activity involves creating a new company to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, amounts owed to creditors and employee entitlements.

ASIC’s media release states that the new measures will assist in detecting, deterring and disrupting illegal phoenix activity by preventing directors from backdating their resignations or leaving a company with no directors. While the laws are targeted at hindering illegal phoenix activity, the changes affect all directors.

Failure to notify ASIC of resignation

The new section 203AA of the Corporations Act sets out that a director’s resignation will only take effect on the original date of their resignation if ASIC is notified within 28 days. If ASIC is not notified within this period, the effective date of the director’s resignation will be the date that ASIC is notified.

For example, if a director resigns on 1 July 2021 but ASIC is not notified until 1 August 2021 (more than 28 days after the resignation occurred), the effective date of resignation will be 1 August 2021.

The practical effect of these changes is that a director will continue to be a director up until the effective date of their resignation and may be liable for any actions taken by the company in the interim period.

If a director fails to notify ASIC in time and wishes to amend the effective date of their resignation, they can apply to ASIC or the Federal Court or Supreme Court for the effective date to be fixed within certain time periods after the date that the person stopped being a director of the company.

Resignation where company has no remaining directors

While the previous laws required a company to have at least one director, there were no laws in place to prevent a director from resigning even if they were the last remaining director.

The new section 203AB of the Corporations Act provides that a director’s resignation will be void if it means that a company will not have at least one director at the end of the day. The ‘end of day’ test means that if multiple directors resign on the same day and leave the company with no directors, all of their resignations will be void. Directors may only leave the company with no directors if a new director is appointed before the end of the day.

ASIC has stated that some limited exceptions apply, including where:

  • the company is being wound up
  • the last remaining director is deceased
  • the person never consented to act as a director of the company.

The new section 203CA also provides that a resolution by members of a proprietary company to remove a director will be void if the company does not have at least one director at the end of the day. This aims to address situations where a director is the only shareholder of a company and resolves to remove themselves as a director.

All company directors should ensure that ASIC is promptly notified of their resignation within 28 days of the date of their formal resignation from the company. It is also important that directors are aware of the composition of the company’s board to avoid being the last director standing, as they will be unable to vacate their position in those circumstances.

For further information on any of the matters discussed in this article, please contact a member of our corporate advisory team.

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