Resigning or removing company directors – no more backdating!

In February 2020, the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth) (the Act) was passed to assist the regulator and liquidators to combat illegal phoenix activity. Illegal phoenix activity includes the creation of 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.

The Act introduces several amendments to the Corporations Act 2001 (Cth) (Corporations Act) which seek to prevent directors from improperly backdating resignations and/or resigning if they are the last remaining director of the company.

The reforms, which came into effect on 18 February 2021, include that:

Date of resignation

Section 203(AA) of the Act now provides that:

• if notice of a director’s resignation is lodged with the Australian Securities and Investments Commission (ASIC) within 28 days after that person ceased being a director, the date of the resignation will be the date that the person resigned from his or her position as a director of the company; and
• if notice of a director’s resignation lodged with ASIC more than 28 days after the person ceased being a director, the effective date of the resignation will be the date that the written notice is lodged with ASIC (section 203AA of the Corporations Act).

The is to encourage director to lodge their notice of resignation promptly with ASIC after they ceased being a director. In addition, importantly, is to avoid directors backdating their purported resignation by several months in an attempt to avoid personal liability for claim such as insolvent trading.

Under section 203AA(5) of the Corporations Act, the director or the company may apply to ASIC or a Court to fix the date that the resignation takes effect. The application must be made within a limited timeframe and applications will be subject to increased scrutiny to ensure the genuineness such an application.

Last director standing

Secondly, section 203AB of the Corporations Act provides that a director’s resignation will not take effect if the resignation leaves the company without a director, ultimately leaving the company in limbo and without a controlling mind. However, there are some exceptions to this, including situations where:

• the last and sole director is deceased;
• the company is being wound up; or
• the director never consented to the appointment.

ASIC will now reject the lodgment 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 replacing that appointment.

Conclusion

It is essential that directors ensure that they are fully aware of their obligations and potential liabilities as a director, and the requirement to notify ASIC of any changes within the required timeframes.  Directors that are unsure about their rights and obligations are encouraged to seek legal counsel in order to mitigate their risks and cover themselves.

Need help?

If you have any questions or wish to discuss the reforms introduced by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth), please contact our Restructuring and Insolvency team.