The Federal Government has enacted the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (the Amendment) to amend the Corporations Act 2001 (Cth) and tighten the rules concerning the obligations of directors and companies when a director resigns from a company and consequences for non-compliance.

In an effort to reduce and prevent illegal phoenixing conduct, the Federal Government amended the rules with which all directors and companies must familiarise themselves and comply.

The Law Prior to the Amendment

Previously, directors were able to resign at any time, in writing, subject to the company’s constitution. The company (or former director) was required to notify ASIC within 28 days of resignation and a director may have been removed by a resolution of company members subject to a company’s constitution.

But even when ASIC was notified outside the 28-day time period, the date of resignation would still be the date of the purported resignation.

Despite there being penalties for non-compliance (for the company and officeholders if they couldn’t show that reasonable steps were taken to ensure the company complied with its obligations), the regime was not sufficient to prevent directors from backdating resignations or abandoning companies.

This inadvertently enabled companies to engage in illegal phoenix activity, which was defined by ASIC in a media release as:

“Where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements.”[1]

Key Features of the Amendment

  1. If ASIC is notified of a director’s resignation outside the 28 days period this will result in the resignation taking effect from the day it is reported to ASIC. If it is reported within 28 days to ASIC it will take effect from the day of the resignation.[2]
  2. A company or director may apply to ASIC or the Court to give effect to the resignation if it is reported outside the 28 day deadline.[3]
  3. A director may not resign from a company if doing so would leave the company without a director – unless the company is being wound up.[4]
  4. A director may not be removed by a resolution of members if doing so would leave the company without a director – unless the company is being wound up.[5]

What if I have missed the 28 day timeline?

If you have missed the 28-day deadline to report to ASIC, either the former director (the director who resigned) or the company, should apply to ASIC within 56 days or the Court within 12 months from the date of resignation, to backdate a resignation that is lodged with ASIC after the 28-day period.[6]

Directors will remain liable during the period between resignation and the notification date.  The penalty provisions will also apply to any late lodgement.

Application to ASIC

If you are making an application to ASIC, when determining whether to allow the resignation to be backdated, ASIC will consider the conduct and representations contained within the application which include the reasons for the delayed notification.

Applications to the court

If applying to the Court, the Court must find that it is just and equitable to backdate the resignation.

Takeaways

These amendments reflect the growing no-tolerance policy of ASIC and other government agencies when dealing with illegal phoenixing behaviour by directors of companies.

Under this new Amendment, all directors, including a person appointed to the position of alternate director – excluding Company Secretaries – will be liable under the reporting requirement to notify ASIC within 28 days of a director resigning.[7]

It is important that under this new Amendment, directors remain vigilant and exercise due diligence when upholding their various duties to ASIC in order to ensure company records are updated and appropriate forms are lodged with ASIC in a timely manner.

We are here to assist with any questions regarding corporate compliance.  Please contact Special Counsel Nicole Wilson.

[1] ASIC, ‘Illegal Phoenix Activity?’ (Media Release, 30 March 2021) https://asic.gov.au/for-business/small-business/closing-a-small-business/illegal-phoenix-activity/

[2] Corporations Act 2001 (Cth) s203AA (Corporations Act)

[3] Ibid s203AA(5)

[4] Ibid s203AB

[5] Ibid s203CA

[6] Corporations Act (n2) s203AA(5).

[7] Ibid.


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