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ASIC stamping out the flames of phoenix activity with new director resignation rules

Tim McGrath ||

This article was originally written for AustralianBiz

Commencing from 18 February 2021, ASIC has changed the way it deals with and processes director resignations, thanks in part to the introduction of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) which notably introduces the new section 203AA of the Corporations Act  2001 (Cth) (the Act).

The amendments prevent a company being left without a director and prohibits ‘back-dated’ director resignations. ASIC has made it abundantly clear that these measures are now in force to combat illegal phoenix activity, the practice of company directors transferring assets of an existing company to another company, whilst debt remains with the old company which is then placed into liquidation, often leaving creditors and employees with nothing.

This rampant behaviour is estimated by the Australian government in its ‘Economic Impact of Potential Illegal Phoenix Activity Report’ to cost businesses $3.171 billion, employees $298 million, and the government $1.660 billion annually, so it’s hardly surprising that the regulator has had its crosshair on the director resignation process.

The new process for director resignations

Prior to the amendments, the date that a director’s resignation from a company was notified to ASIC, had no bearing on the effective resignation date such that a resignation could be notified long after the effective resignation, which ASIC would then backdate in its records and charge the company a fee for the late lodgement.

This naturally caused significant problems as some directors used ASIC’s processes to backdate their resignations which gave rise to disputes between current and former directors as to whom held directorships at relevant times in the context of Court proceedings for breaches of director’s duties and insolvent trading offences, and  enabled directors involved in phoenixing activity to backdate their resignation to a time prior to their offending conduct and escape liability to the detriment of the employees, other office holders and creditors left behind.

The new section 203AA of the Act provides:

  1. A person’s resignation as a director of a company takes effect on:
  2.  If, within 28 days after the day the person stopped being a director of the company, ASIC is notified of that fact under subsection 205A(1) or 205B(5)—the day the person stopped being a director of the company; or
  3. In any other case—the day written notice is lodged with ASIC stating that the person has stopped being a director of the company.

In line with the new changes above, the company or the resigning director must notify ASIC within 28 days of the resignation. If they do not notify ASIC within 28 days, the date notification is submitted to ASIC will be taken to be the effective date of resignation.

Resignations notified to ASIC within the 28-day time limit will continue to be treated by ASIC and recorded as being effective on and from the date of resignation rather than the date notice is given to ASIC.

The amendments also now ensure that a director’s resignation does not take effect if it would leave the company without a director (section 203AB(1)), and any member’s resolution to remove a director is void if it would leave the company without a director (section 203CA(1)).

In the context of an insolvent company, if the resignation date of a director of a company is to take effect on or after the day the winding up of the company has begun, then the resignation is taken to be valid pursuant to Section 203AB(2) of the Act.

Applications to ASIC and the Court to accept backdated resignations

Circumstances will arise where a director has otherwise in fact resigned, but failed to notify ASIC within the 28 day time frame provided for in section 203AA(1). In order to temper the harshness which would otherwise flow from the operation of section 203AA(1)(b) (including, for personal liability for certain taxes and entitlements to employees in that period), section 203AA(2) permits a director to make an application to either ASIC or the Federal or State Supreme Courts for an order fixing the day a director’s resignation takes effect.

A person may make an application to a Court within 12 months after the day the person stopped being a director of the company or for such longer period as the Court will allow, and otherwise, within 56 days of when the director ceases to be a director of the company on application to ASIC.

The Court may only fix the date on which a person’s resignation takes effect where it is satisfied it is just and equitable to do so. The concept of just and equitable grounds have a long history in the Courts, particularly as they pertain to applications for the winding up of companies. And whilst there is no authority considering the terminology as used in the current section 203AA, the Court’s comments on the just and equitable grounds in other contexts within the Act will be highly instructive when considering its application in section 203AA.

ASIC is not bound by the just and equitable grounds when determining whether to fix the date of resignation, but rather have regard to the following:

  1. any conduct, act, omission or representation of the applicant in relation to notifying ASIC of the resignation; and
  1. the reasons for any delay in notifying ASIC of the resignation.

It is notable that this is not an exhaustive list but rather comprises the minimum factors which ASIC must take into account when determining an application to fix the date on which a person’s resignation as a director is to take effect.

Tips for companies and directors

Where there is increasing pressure being placed on officers and directors of companies, including in the seemingly ever expanding field of personal liability through the erosion of the corporate veil, it is more important than ever that companies and particularly directors ensure that their records are up to date and accurate.

Directors must now be well aware that they are potentially personally liable for certain corporate taxes and employee entitlements, including by way of the superannuation guarantee charge (SGC), and should therefore proceed with diligence and caution in discharging their officeholder duties.

Directors who have resigned or are intending to resign should consider the following:

  1. For the abundance of caution and as a matter of course, lodge a ‘Form 370 – Notification by officeholder of resignation or retirement’ with ASIC to ensure that a director is not caught out by any delay by the company in updating its details which falls outside of the 28-day time limit, and ensuring that the effective resignation date is correct.
  2. Writing to the company’s board informing it of their resignation and ensuring they keep a copy of that document.
  3. Directing/requesting the company to notify ASIC of the director’s resignation by way of lodgement of all necessary documentation.
  4. Conduct a search of the ASIC register in relation to the company well in advance of the 28 day expiry period to ascertain if the company records have been changed to reflect the resignation of the director.

It should be noted that it is not guaranteed that ASIC or the Court will favourably determine an application to backdate a resignation, and the costs associated with conducting these applications are significant. The costs alone for failing to comply with the Act can be substantial also, with fines of up to 120 penalty units ($26,640 at the time of writing) for a failure to notify ASIC within two days of the Court making an order to backdate the effective date of a director resignation.

An effective strategy to avoid issues and disputes regarding director resignations is to ensure that company details are kept up to date and resigning directors get on the front foot with notifying ASIC, rather than waiting for the company to update its details.

The amendments to the Act illuminate the requirement for proper corporate governance, and the need for a proactive and diligent approach to directors’ obligations under the Act to minimise potential exposure to claims.

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