Illegal phoenixing reforms mean new restrictions on director resignations

In February 2020, the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Act) was introduced to target phoenixing, where directors transfer company assets to a new entity, leaving old debts and unpaid creditors with the old company. The Act introduced a raft of new measures designed to improve director accountability, introduce new criminal and civil penalties and grant new powers to the Australian Securities and Investments Commission (ASIC). Among these changes were amendments designed to prevent the improper backdating of director resignations and ensure that companies are not improperly left without directors, however, their commencement was initially deferred.

As of 18 February 2021, these remaining measures – which are of relevance to all directors – will now come into force. In this article, we briefly revisit these changes and look at the impact on directors and companies going forward.

Key amendments at a glance

The Act introduced a number of amendments to the Corporations Act 2001 (Cth) (Corporations Act) and the Taxation Administration Act 1953 (Cth), including:

• new criminal offences and civil penalty provisions for contraventions by directors, pre-insolvency advisors and other facilitators
• extending the recovery provisions available to ASIC and liquidators to assist the recovery of assets lost through illegal phoenix activity
• prohibiting directors improperly backdating resignations, or ceasing to be a director, in circumstances where this would leave the company with no directors to avoid liability or prosecution
• expanding the power of the Commissioner of Taxation to collect estimates of anticipated GST liabilities, to hold company directors personally liable for a company’s GST liabilities and to retain tax refunds in certain circumstances.

You can read more about these amendments in our previous article here.

Changes to director resignation and removal

As of 18 February 2021, a director’s resignation will now take effect on:

• the date that the person ceased as a director, if ASIC receives notice of the resignation within 28 days of it occurring;
• the date the notice is received by ASIC, if ASIC receives notice of the resignation more than 28 days after it occurred; or
• if the resignation of that director will leave the company without at least one director – it will not take effect. A similar restriction applies where a director is removed by resolution of members - such resolutions will be void. Exceptions apply where the company is being wound up.

This means that if a company or director fails to promptly notify ASIC of their resignation as a director, they may be deemed to have continued as a director beyond the date of their resignation. The change is designed to prevent directors from improperly backdating their resignation to avoid culpability for subsequent actions taken by their company. This also applies to alternate directors.

Where this occurs, it is open to the director or the company to make an application to ASIC (within 56 days of cessation) or the Court (within 12 months of cessation) to fix the resignation date. ASIC will consider the applicant’s conduct with respect to the notification and any reasons for the delay, while the Court will only fix a date if they are satisfied it is just and equitable to do so.

What does this mean for you?

While these reforms are targeted at illegal phoenixing, their application is broad and will impact on ordinary directors and companies too. In the past, a tardy notification may have incurred a late fine, but these changes now mean that a failure to notify ASIC within the 28-day timeframe could see a director’s tenure – and their liability – artificially extended beyond the term of their appointment.

Companies should re-examine their compliance processes to ensure any changes to company details are promptly notified to ASIC. Outgoing directors should ensure their former company lodges a notice of their resignation , or consider lodging such notice directly themselves to avoid any extension to their recorded period of appointment.

Directors of small companies should consider their position if there are disputes, as you may not want to be left as the last director and be held responsible for the actions of a retired director with whom you may have been in disagreement with. In the longer term, querying the circumstances of the departure of past directors may form part of the due diligence for any incoming director or purchaser.

Authors: Georgia Milne & Shenaye Ralphs

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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