New Director Requirements in Light of Phoenix Legislation

23 APR 2021

 

Resigning directors are now subject to new requirements under the Corporations Act 2001 (Cth) as a result of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Act). 

The Act was passed by Parliament to help liquidators and regulators combat illegal phoenix activity. These new requirements for directors came into effect from 18 February 2021 and seek to prevent directors from avoiding their duties by:

  1. backdating resignations; or 
  2. ceasing to be a director in circumstances that would leave a company with no directors. 

These changes are in addition to the previous changes that were introduced when the Act first came into effect on 17 February 2020. An outline of the notable changes can be viewed here https://www.marsdens.net.au/about-us/latest-news/anti-phoenixing-laws-rise-from-their-ashes/. 

What is Illegal Phoenix Activity?

Illegal phoenix activity involves the deliberate and systematic transferring of assets from one entity to another to avoid paying liabilities such as tax, employee entitlements and debts owed to creditors. 

The original entity is liquidated by the directors, who then recommence with either the same or a very similar business through a new corporate entity – often using the same customers and employees. 

Not all phoenix activity is illegal. A legitimate business rescue conducted within the confines of the law, and with the directors acting in good faith, is not illegal. 

As a general rule, the course of action must be reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator. 

New Requirements for Directors 

Date of Resignation 

Resigning directors or the company will now be required to notify ASIC of a director’s resignation within 28 days. If ASIC is not notified within the 28-day timeframe, the effective resignation date will be the date the document was lodged. 

If a director or company want to fix an earlier resignation date, either can apply to ASIC or the court to do so. An application needs to be made within:

  1. (1)fifty six (56) days of the actual resignation date if the application is to ASIC; or 
  2. (2)twelve (12) months of the actual resignation date if the application is to the court, or such longer period as the court allows. 

Last Director Standing 

The Act also prevents a company from removing the last director on ASIC records, if doing so would result in the company having no directors. If a director has resigned, the resignation will be deemed invalid. 

In circumstances where multiple directors resign on the same day, all resignations will be ineffective unless:

  1. one (1) director remains appointed; or 
  2. a replacement director is appointed that day.

There are some limited exceptions where the resignation will still be deemed valid, including when:

  1. a company is being wound up or is under external administration; 
  2. the director never consented to the appointment; or 
  3. the last director is deceased. 

Key Takeaways 

The effective date of resignation can have significant implications with regards to liability of directors under the Corporations Act.

It is therefore important that company directors act diligently to ensure that a company’s records are kept up to date and the appropriate forms are lodged with ASIC in a timely fashion to avoid falling foul of the new legislation. 

If you would like advice or assistance in relation to the above or any other Commercial matters, please contact our accredited business law specialists and Partners Justin Thornton on jthornton@marsdens.net.au and Rahul Lachman on rlachman@marsdens.net.au or otherwise by calling them on (02) 4626 5077.

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.

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