Notify before Saying Bye: ILLEGAL PHOENIX ACTIVITY

In February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (the Amendments) was enacted, in an effort to support regulators and liquidators in curtailing illegal phoenixing activity. As a consequence of the Aments, from 18 February 2021, 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. This article provides a brief update on the impact of the Amendments on company directors.

What is illegal phoenix activity?

Illegal phoenix activity occurs where a director creates a new company to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes and amounts owed to creditors and employees.

When must ASIC be notified of resignation?

The Amendments inserted a new section 203AA to the Corporations Act 2001 (Cth), which provides that from 18 February 2021, the resignation of a director only takes effect on:

1. where ASIC was notified within 28 days of the resignation; the date the person ceased being a director; or

2. where ASIC was not notified within 28 days of the resignation, the date ASIC was notified.

In practical terms, a failure to provide notice will result in the effective date of resignation being the date the director notified ASIC. A director will subsequently have been taken to have continued their role until the effective date of their resignation. This may result in various liabilities for actions taken by the company in the interim.

If a director fails to provide appropriate notice, they can apply to ASIC, the Federal Court, or the Supreme Court to amend the effective date. If the application is made to ASIC, it must be submitted within 56 days after the day the person stopped acting as director. If the application is made to the Court, it must be made within 12 months after the day the person stopped being a director.

Will resignation be accepted if the company has no remaining directors?

Section 203AB was also inserted into the Corporations Act and provides that a director resignation will be void if will result in the company being left without at least one director at “the end of the day the resignation is to take effect”. This test also means that if multiple directors resign simultaneously, all resignations will be void unless at least one director is left. If a new director will be appointed before the end of day, the resignation will take effect. ASIC has indicated that an exception may apply where the company will be wound up.

A resolution to remove a director may also be void if the company does not have at least one director at the end of the day, as provided under the new section 203CA. This is important to keep in mind for directors who are also sole shareholders of the company.

What does this mean for a director?

As a company director, it is essential that the new legal requirements are complied with to avoid potential exposure to director’s liability. It is critical to notify ASIC within 28 days of a resignation. It is equally important to be aware that a resignation in most circumstances, will not be effective if the company is left without a director.

Henry William Lawyers is available to assist directors with understanding their corporate obligations including the legal requirements for resignation.