This article deals with one aspect of the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (‘Amending Act’), relating to the treatment of resigning directors as outlined in Schedule 2 – ‘Improving the Accountability of Resigning Directors’ of the Amending Act.
On 18 February 2020 the Amending Act came into operation to give regulators additional enforcement and regulatory powers needed to 'detect and disrupt phoenix activity, and to prosecute directors and other professional advisers who engage in or facilitate this activity'.
Illegal phoenix activities are the deliberate stripping and transferring of assets to a new company prior to liquidation, done to avoid liabilities owed by the company in liquidation to creditors, including employees and government bodies, such as the ATO.
The Amending Act primarily amends the Corporations Act 2001 (Cth), although several other Acts were also amended.
What are the new provisions relating to resigning directors?
In summary, the Amending Act prevents directors improperly backdating resignations more than 28 days, or being able to cease as a director, when this would leave the company with no directors avoiding liability or prosecution.
When does a director’s resignation take effect?
A director or alternate director’s resignation will take effect on the day notice of the resignation is lodged with ASIC unless the resignation was within 28 days prior to the notice being lodged, in which case it will take effect on the date specified as the effective date of resignation. These amendments effectively stipulate that a director’s resignation may only be backdated a maximum of 28 days (unless an application is made to ASIC or the Court to amend the resignation day).
A company must be left with a least 1 director
Once the new amendments commence, company directors will no longer be able to resign if this will leave the company without a director, unless the resignation takes effect on or after the day that the winding up of the company commences.
Furthermore, a members’ resolution approving the removal of a director will be void if it leaves the proprietary company without at least one director.
When do the new requirements commence?
The Amending Act received Royal assent on 17 February 2020 and came into effect on 18 February 2020. However, the amending provisions (Sections 203AA, 203AB & 203CA) relating to the resignation of directors were introduced with a 12-month transition period. Hence, these changes are expected to commence from 18 February 2021.
What does this mean?
Changes to the prescribed ASIC Form 484 - Change of Company Details and Form 370 - Notification by officeholder of resignation or retirement are expected to be introduced by ASIC mid-February 2021, which will result in these forms being rejected by ASIC if the form is being lodged to resign the sole director, without appointing a replacement director. This in effect prevents the last or only director resigning leaving the company as an empty corporate shell with no directors.
Furthermore, in the event a Form 484 or Form 370 is lodged with ASIC more than 28 days after the purported resignation of a director or alternate director, the resignation will take effect from the day it is lodged with ASIC. A company or a director may apply to ASIC or the Court to backdate the resignation more than 28 days before the lodgement, if there is sufficient evidence to prove the resignation actually occurred in the earlier timeframe and the Court is satisfied that it is just and equitable to do so.
Key message for officeholders and ASIC Agents
Be diligent in notifying ASIC of directors’ resignations promptly, otherwise you may inadvertently be forced to accept the lodgement date as the effective date of a director’s resignation or need to attend to further paperwork to apply to ASIC or the Court to rectify it. It will no longer be a case of just a late lodgement penalty, if lodged late.