Thinking | 23 February 2021

Important changes to director resignation laws to combat illegal phoenixing

By Pia Rossignuolo

The Federal Government has introduced a range of new laws to help combat illegal phoenix activity. The rules on resignations for directors have tightened, as of 18 February 2021, under the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020.

A company director will not be able to backdate their resignation more than 28 days or resign if it means the company would be left without a director, ASIC explained in a media release, which also stated:

‘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, creditors and employee entitlements.

These reforms assist the joint effort of ASIC and other government agencies in detecting, deterring and disrupting directors and advisers who engage in illegal phoenix activity.

Illegal phoenix activity can involve serious breaches of the law that include directors' duties, fraudulent concealment or removal of assets and fraud by company officers under the Corporations Act 2001. Penalties include large fines and up to 15 years imprisonment for company directors and secretaries and others involved.

Resignation of directors: when resignation takes effect

Firstly, under newly commenced section 203AA of the Corporations Act 2001 (Cth) (Corporations Act), a resignation of a director takes effect:

  1. if, within 28 days after the day the person stopped being a director of the company, ASIC is notified of that fact, the day the person stopped being a director of the company; or
  2. in any other case – the day written notice is lodged with ASIC stating that the person has stopped being a director of the company.

Therefore, if the written notice is lodged after 28 days of the day the person stopped being a director, the resignation takes effect on the day the written notice is lodged.

According to ASIC, ‘Backdating resignations was a common tactic used by directors to engage in illegal phoenix activity’.

The section applies to directors, and includes a person appointed to the position of alternate director, but does not apply to company secretaries.

If the 28-day timeframe is missed, an application can be brought under section 203AA(5) to fix the resignation day as the day the person’s registration takes effect:

  1. to ASIC within 56 days after the day the person stopped being a director; or
  2. the Court either 12 months after the day the person stopped being a director or such longer period as the Court allows.

Resignations of directors has no effect if the company has no other directors

Secondly, under newly commenced section 203AB of the Corporations Act, resignations of directors will not take effect if, following the resignation, the company does not have at least one director.

There was previously a disconnect.  Despite corporations being required to have at least one director at all times under section 201A of the Corporations Act, there was nothing preventing the lodgement of notices of director resignations with ASIC, in circumstances where the resignation is in respect of the sole (or only remaining) director of a company.

From now on, ASIC will reject the lodgement of Form 484 Change to company details or Form 370 Notification by officeholder of resignation or retirement, where the result would be that the last appointed director ceases their appointment without another director replacing that appointment.

The new section does not prevent the resignation of a director of a company taking effect if the resignation is to take effect after the winding up of a company has begun[1], or other general exceptions (for example, the death of a director, or where the person did not consent to act as director).

Takeaways

It’s simple: directors need to act diligently to ensure that a company’s records are kept up to date and appropriate forms are lodged with ASIC in a timely fashion.


[1] Section 203AB(2) provides that the new stipulation does not prevent the resignation of a director of a company taking effect if the resignation is to take effect on or after the day that the winding up of the company is taken, because of Division 1A of Part 5.6, to have begun.

Contact

You might be also interested in...

Tax | 17 Feb 2021

Liability of directors and associates for company tax obligations

In the second of our series of articles on the avenues for small to medium businesses to deal with their overdue tax debts, we look at when directors and their associates can be held personally liable for a company’s tax debts.

Tax | 10 Feb 2021

How to deal with overdue tax debts

In the first of our series of articles on the avenues for small to medium businesses to deal with their overdue tax debts, we look at how and when tax liabilities arise and what options are available to the ATO to pursue them when overdue.