Earlier this year the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (‘the Act’) came into effect aimed at thwarting directors from engaging in illegal phoenixing activity through amendment of the Corporations Act 2001. Here is what you need to know about the changes, and how it might affect the way directors resignations are undertaken under the Corporations Act 2001:
What is Illegal Phoenixing?
Illegal phoenixing can take a number of different forms and structures but is generally where a new company is created with dishonest intentions to continue the business of an existing company which is subsequently liquidated. It generally includes the directors transferring assets to a new company without complying with the legal obligations and honouring existing debts of the old company, leaving creditors, employees and other connected parties unpaid. Illegal phoenixing can often involve breaches of director’s duties and fraud by company officers under the Corporations Act 2001.
Legal phoenixing does exist where the new company is created honestly, and in complete compliance with legal obligations but is not considered for the purposes of this article.
What changes does the amendment implement?
Amongst other changes, the Act, implemented as of 18 February 2021, provides new direction for the resignation of directors, ultimately preventing directors from improperly backdating their resignations or leaving companies without a director. To comply and if you wish to resign as a Director you must notify ASIC within 28 days of the resignation. If you fail to notify ASIC within 28 days, the resignation date will be taken as the lodgement date with ASIC. This can have serious consequences for directors who may inadvertently open themselves up to breach of director duty and insolvent trading claims of failed companies.
It is anticipated that having an express legislative prohibition will in and of itself influence positive behavioural norms, by emphasising the delineation between acceptable business conduct and illegal phoenix behaviour in the context of failed ventures.
There is an option for honest directors who have accidently missed the deadline to apply to the Court or to ASIC within certain times in order to fix the date, where it is ‘just and equitable to do so’. However, this process is timely and should be avoided if possible but initial compliance with the deadlines.
Key take away points
The upshot of the changes is that Directors should be conscious of the timing and the circumstances surrounding their resignation and what is required of them; if notice is lodged with ASIC outside of 28 days, resignation will not take effect on the day it was intended.
While the new laws were implemented with the intention of preventing dishonest directors, they may just as easily affect honest directors who attempt to legitimately resign.
For more information or if you would like to discuss your personal situation further please do not hesitate to contact Sophie Inwood on 03 8692 9000.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.