Did you know director resignation laws have changed?
Further changes to the Corporations Act 2001 (Cth) implemented by the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) came into effect on 21 February 2021. The new laws combat those engaged in exploiting company structures to the detriment of unsecured creditors.
What is illegal phoenix activity?
Illegal phoenix activity involves the practice of stripping a company of its assets and also removing its officers and directors by transferring them to another company for little or no consideration. The original company is then left with liabilities to its creditors with no assets or revenue to satisfy the liabilities, often leaving creditors with no recourse to the assets that were transferred to the new entity.
Prior to these reforms, the estimated direct costs of illegal phoenixing activity to the Australian economy was between $2.85 to $5.13 billion annually. The new laws address a common tactic used by directors engaging in illegal phoenix activity of backdating their resignation or ceasing to be a director such that the company is left with no directors.
Measures designed to target phoenix activity
From 18 February 2021 onwards, unless ASIC is notified of the resignation of a director within 28 days of the resignation, the resignation will be recorded as the date of lodgement of the resignation notice. To alter any resignation date in such instances will require an application to ASIC or the Court. Applications to ASIC to alter the resignation date should be made within 56 days of the claimed registration date.
The reforms also prohibit a company from removing the company’s last remaining director from ASIC’s records and thereby bring a stop to instances where a company is left with no directors. Some exceptions may apply – for example, if a director passes away or the company is wound up.
Illegal phoenix activity can involve serious breaches of the law such as but not limited to breach of directors’ duties, fraudulent concealment or removal of assets and fraud by company officers under the Corporations Act 2001 (Cth). Penalties can include large fines and up to 15 years imprisonment for company directors, secretaries and others involved in the conduct.
Given the breadth of penalties for non-compliance with the new phoenixing laws, it is incumbent upon businesses to spend time ensuring quality corporate governance and succession planning, as failure to do so may result in civil and criminal penalties.
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