Not so fast, director!

The (Anti) Phoenix is Rising – Part 1

For several years now, the Commonwealth Government has been amending federal legislation in an attempt to thwart the efforts of those who make a living out of the use of “Phoenix companies”¹.

The latest effort has been the passing of the Treasury Laws Amendment (Combating Illegal Phoenixing Bill) 2019 (the Bill) by both houses of parliament on 5 February 2020. The Bill is yet to receive Royal Assent, although this is anticipated very soon.

The Bill makes several important changes to the Corporations Act 2001, and the GST legislation to close off loopholes that would otherwise have been available to those who wish to start Phoenix businesses. They include the creation of a new form of “voidable transaction” known as a “creditor-defeating disposition”; changes to the validity and timing of the resignation of a director of a company; and additional personal liability upon directors for Goods and Services Tax. This article will address the director resignation amendments.

When does a director resign?

Under the current section 203A of the Corporations Act, a director may resign by giving written notice of the resignation to the company at its registered office. This is a “replaceable rule” so it can be varied by the operation of a company’s Constitution. There is no provision in the Corporations Act regarding the calculation of the legal date of the resignation, and we have been left to assume that the resignation date must therefore equate with the date of the written notice.

However, I have seen instances in companies where a director purportedly resigns, but the notice to ASIC of the resignation is not lodged for some significant time, even many years, after the alleged resignation. No-one other than the director is even aware of the resignation.  In the most blatant example, a director was appointed on the day of the company’s incorporation in 2012. That director had sole signatory authority on the company’s bank account. Notification of that director’s resignation was lodged with ASIC in September 2017, however the resignation allegedly occurred on the same day as the appointment as director 5 years before! A liquidator was subsequently appointed in April 2018 (funny about that). In the meantime, the company’s other director had been declared bankrupt, the company had traded and incurred debts.

The Bill adds a new section to the Corporations Act² that clearly determines that a person’s resignation as a director of a company takes effect on the day that written notice is lodged with ASIC stating that the person stopped being a director of the company.  The exception is where a notice is lodged within 28 days of that resignation, whereupon the resignation date is the date of the actual resignation. Obviously, this encourages companies to lodge the requisite notice with ASIC promptly.  The Court or ASIC can order a correction to the resignation date, however an application for such an order needs to be made to ASIC within 56 days of the actual resignation date, or within 12 months of the actual resignation date if the application is to the Court.

Another loophole previously used by some nefarious Phoenix operators was to simply resign as a director, but not appoint any other replacement director, thus leaving the company without any registered director at all. Yet somehow the company would continue to trade, incur debts or divest itself of all its assets. The Bill addresses this tactic by providing for a new section³ whereby any resignation of a director of a company does not take effect if, on the date of that resignation, the company does not otherwise have at least one other director.  Furthermore, any resolution purporting to remove a director, in circumstances where there is no other director available, will be void (section 203CA).

These new provisions will not be replaceable rules. They will apply to all companies.

At the very least, these new provisions in the Bill will assist liquidators with any claims against someone who was once registered as a company’s director but somehow disappeared shortly prior to the company’s demise.

1 In Ancient Greek folklore, a phoenix is a long-lived bird that cyclically regenerates or is otherwise born again. Associated with the sun, a phoenix obtains new life by arising from the ashes of its predecessor. Some legends say it dies in a show of flames and combustion, others that it simply dies and decomposes before being born again (see Wikipedia for more).  In corporate Australia, this behaviour sounds familiar.

2 Section 203AA

3 Section 203AB